Wednesday, April 01, 2009

From the Editor: The Children’s Investment what’s-its-name

Written by 

By William C. Vantuono, Editor

william-vantuono-web.jpgDoes anybody remember The Children’s Investment Fund? You know, the all-knowing activist hedge fund that spent much of 2007 and 2008 strutting about, hurling criticisms at CSX, the world’s worst railroad, and its inept, lazy management team? Yes, that TCI—those purveyors of truth, justice, and the short-term-investment way, who mounted a valiant proxy war to save CSX and the railroad industry from itself?

I barely do, thank goodness.

Last year’s bitter proxy battle involving CSX and TCI is quickly fading into the railroads’ subconscious memory. Though TCI managed to get four of its board candidates seated, none of the changes for which TCI was pushing—sweeping structural and management changes, leveraging CSX to junk credit status, doubling shipper rates over 10 years, freezing or scaling back capital investment—have come to pass, and there’s no reason to believe they ever will.

The dust has settled. How is CSX doing? On March 23, in a spectacular railroad stock recovery (a day that saw the Dow Jones Industrial Average rise 6.75%), CSX shares led the railroad parade, rising 12.13%, followed by Kansas City Southern, up 9.99%; Norfolk Southern, up 9.49%; Union Pacific, up 8.65%; and BNSF, up 8.63%.

What of TCI, which we strongly criticized in our December 2007 issue (illustration) as “driven by short-term financial interest and a fundamental lack of understanding of the railroad industry and how it functions”? TCI registered its biggest annual loss in 2008 (more than 43%). Co-founder Snehal Amin, who oversaw TCI’s proxy battle with CSX and did most of the trash-talking, resigned last month. He was the last co-founder of TCI still working with Christopher Hohn, one of the four elected to the CSX board. Hohn will not seek re-election and will be gone in May.

Maybe Hohn found it wasn’t worth his while emerging from his London counting house once a month (my apologies to Charles Dickens) to attend board meetings in Jacksonville, especially since none of his vast knowledge of American freight railroading would be put to use.

Does anybody really care? I didn’t think so.

ra-fte-12-07.jpg As for the three remaining TCI board placements—Tim O’Toole, Gilbert Lamphere, and Alexandre Behring—the first two are experienced railroaders. All three are, according to CSX chief executive Michael Ward, focused on the long term. They’re the bright spot in an otherwise forgettable episode in American railroading.

Ward, Railway Age’s 2009 Railroader of the Year, told us in the January issue, “The attitude of the board at this point is, we’ve been creating great value for our shareholders here over the last five years, and all of us want to continue to do that. If there are good ideas that can help us do that, we’re going to embrace them. One thing that was part of [TCI’s] philosophy was that our company ought to be extremely leveraged. [TCI’s board members] changed that viewpoint . . . and they agree with our philosophy that we should be an investment-grade company.” At the March 17 Railroader of the Year award presentation in Chicago, Ward reiterated what he told us in January.

If we can take anything away from the TCI experience and store it in our vast depository of institutional knowledge, it’s this: Our industry, with all its imperfections, is fundamentally about strength, resilience, and hard work. Portraying a hedge fund’s attempt to exploit one railroad’s success as a “good guys vs. bad guys” story may be an oversimplification, but it’s satisfying to know that, at least in this case, the good guys came out on top.

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