Activist investor TCI Fund Management turned up the pressure on Canadian National Railway Co. on Monday, unveiling a slate of four people it wants to join the railway’s board in a meeting to be called “shortly.”
CN’s second-largest investor made the move one day after Kansas City Southern Railway terminated CN’s takeover agreement in favour of an offer from Canadian Pacific Railway Ltd.
“The business has been underperforming for too long, so change is required,” said British billionaire Chris Hohn, who leads TCI. “We did not seek a proxy fight, but without urgent action CN’s operational and financial performance will continue to lag its peers under a board that lacks the right railroad experience and operational expertise.”
CN acknowledged TCI’s press release but said it has yet to receive an official request for a shareholders’ meeting. “Once CN is in receipt of the requisition, it will review it and comment further in due course,” CN said on Monday.
In addition to chief executive officer Jean-Jacques Ruest, TCI targeted four CN directors for replacement: chairman Robert Pace, and directors Kevin Lynch, James O’Connor and Laura Stein.
TCI wants to install as CEO former CN executive Jim Vena, in addition to the following board members: railway veteran Gilbert Lamphere; Allison Landry, a banker and director of XPO Logistics Inc.; Rob Knight, former finance chief at Union Pacific Corp. railway; and Paul Miller, a former CN executive.
Mr. Vena was employed for 40 years by CN, working his way up from labourer to train engineer before departing as chief operating officer in 2016. He became operating chief of Union Pacific, the second-biggest railway in the United States, in 2019.
Mr. Vena transformed UP’s operations based on the cost-cutting operating model pioneered at CN and CP by past CEO Hunter Harrison before stepping back to become an adviser to the company chairman this year.
“We have assembled an independent, accomplished and world-class slate of director nominees,” Mr. Hohn said. “They all have had long and distinguished careers operating in and analyzing the railroad industry. They bring vast railroad experience and knowledge, and they also share a common and very achievable goal: to create a much-needed culture of operational excellence at CN, which is essential if the company is to reach its full potential.”
TCI owns more than 5 per cent of CN’s shares, worth about $4-billion. TCI is also the largest owner of CP shares, at 8 per cent.
TCI in 2008 teamed up with 3G Capital Partners to win a proxy fight at U.S. railway CSX Corp., replacing four of 12 directors.
KCS rejected CN’s US$29.8-billion takeover offer after the U.S. regulator, the Surface Transportation Board, blocked a key step in CN’s bid. The STB said the voting trust in which CN planned to hold KCS while awaiting STB approval of the takeover was not in the public interest. The regulator has already approved CP’s voting trust, a structure that protects the operating integrity of an economically important company while a deal is reviewed.
That made CP’s lower bid for KCS, worth US$27.2-billion, more attractive.
KCS’s board on Sunday declared CP’s offer “superior” and said it planned to terminate the CN agreement.
The CP takeover is subject to approval by the STB and Mexican regulators. However, the STB has already approved the voting trust, and has said the deal will receive less scrutiny given the smaller sizes of both CP and KCS.
CN, whose railway parallels that of KCS in the Southern U.S., pressed ahead with its offer despite a warning in May from the STB over the amount of debt it would take on to complete the deal. The U.S. Department of Justice in May also opposed CN’s voting trust.
“The bid for KCS exposed a basic misunderstanding of the railroad industry and regulatory environment,” Mr. Hohn said. “The board consistently misjudged the STB and displayed flawed decision-making, committing billions of dollars to an ill-conceived pursuit of an unattainable asset. CN should focus on getting better rather than bigger.”
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