Report: Activist Investor Attempting NS Takeover

Norfolk Southern photo

According to an unsubstantiated late-Jan. 31 Wall Street Journal article, an investor group led by activist Ancora Holdings Group, LLC intends to run a proxy fight and replace Norfolk Southern President and CEO Alan Shaw. Ancora has reportedly built a position in NS and would likely try to take control of the Board to enact management and operational changes. We highlighted this as the number one risk in our downgrade earlier this week. NSC was up ~5% (about $15) after hours.

Ancora has reportedly built a $1 billion position in NSC and looks to remove Shaw. NSC has struggled to get itself back on track, and as we highlighted in our downgrade earlier this week, has significantly underperformed vs. its East Coast peer CSX. The article suggests that John Kasich, the former Republican governor of Ohio who led multiple rail initiatives, or Sameh Fahmy, a former executive at Kansas City Southern, CSX and CN, could be Board nominations. The WSJ states that Ancora has met with NSC management in recent weeks.

Recall our downgrade earlier this week where we stated: “Given the company’s underperformance vs. its peer group, we wouldn’t be surprised to see an activist step into the arena; pressure on the Board could lead to (1) a more rigorous cost-cutting effort, and (2) changes at the upper management level—such changes may give investors more conviction in NSC’s ability to close the gap between the U.S. Class I’s.”

Ancora should be a familiar name to transport investors as the activist was also involved in attempting to drive changes at CHRW (C.H. Robinson) and holds a 1.8% stake in the company and two seats on the 15-member Board. The activist started with a 0.4% stake in CHRW in 4Q 2021 and built up to 1.9% as of 4Q 2022. We note to investors that Ancora was not successful in placing their preferred candidate in the top job at CHRW, and CHRW has underperformed vs. its peers. Ancora also holds a 2.9% stake in Forward Air, which has proven messy with the activist opposing the company’s proposed deal with Omni resulting in a large drawdown in the company’s stock.

Editor’s Comments: According to Capitol Hill Contributing Editor Frank N. Wilner, “Holding company acquisitions of railroads are not regulated by the Surface Transportation Board so long as the holding company (i.e., hedge fund) does not already own a railroad. Although Berkshire Hathaway had presented itself as a non-railroad holding company exempt from STB regulatory oversight when it acquired 100% of BNSF voting stock nearly 15 years ago, it was discovered that Berkshire Hathaway unintentionally failed to reveal ownership of two small railroads, which subjected the transaction to limited STB oversight. A financial penalty was imposed for the failure to disclose, and Berkshire Hathaway voluntarily sold the two small railroads so that the transaction would be exempt from prior approval by the STB. However, holding companies controlling even just one railroad are subject to reporting requirements established by the STB. Also, financial transactions involving railroad stock shares are regulated by the Securities and Exchange Commission. That regulatory power shifted in 1995 under the ICC Termination Act, which created the STB.”

Now, here’s my two cents’ worth: This move by Ancora is not about Norfolk Southern improving operations, growing business, becoming safer or strengthening relations with its employees. It’s all about money, making a quick buck and walking away—period. NS shareholders have already profited from that single Wall Street Journal article. NS shares rose 5% in after-hours trading on Jan. 31, and by close of business Feb. 1 were up 9.1% Surprise, surprise, surprise! as Gomer Pyle used to say on TV. – William C. Vantuono