Jason Seidl: Quick take on EHH at CSX

Now that E. Hunter Harrison has become CEO of CSX, “we expect additional layoffs in addition to the recently announced 1,000 members of management,” says Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “We also expect CSX to easily exceed the previous long-term operating ratio goal of 65% over the next few years.”

“In a much expected announcement, CSX Corp. named Hunter Harrison as Chief Executive Officer, replacing the retiring Michael Ward, who will remain as a consultant,” Seidl notes. “The company also reached an agreement with activist investor Mantle Ridge that gives them five new seats (including Harrison and Mantle Ridge founder Paul Hilal) on the CSX Board of Directors. With three incumbent board members announcing their intent to resign their positions at the end of the year, the Board will have 13 members now, with current director Edward Kelly III becoming Chairman and Paul Hilal Vice Chairman.

“According to reports, Harrison’s compensation will be roughly $200 million, down from the reported $300 million originally requested. He will receive incentive options to purchase nine million shares of CSX at its current trading price. These options will vest over four years, half based on service and half based on the achievement of designated performance goals over that period. A previously requested $84 million payment of compensation and benefits forfeited by Harrison as a result of his separation from Canadian Pacific will now be put to shareholders for a vote.

“While CSX was already in the process of laying off/cutting 1,000 people from its management ranks, we fully expect that Harrison will push that number higher and also cut into the rank-and-file headcount by reducing/combining yards and shops. It is also expected that the company will now focus on faster-growing areas of its network, which could lead to some shedding of lines.

“Harrison’s proverbial playbook of cutting ‘fat’ and running a scheduled railroad may not seem complicated, but his methods are time-tested and we fully expect him to easily exceed the company’s previous long-term OR target of 65% over the next few years. Our previous estimates are currently under review.”