Norfolk Southern’s decision to hire a chief operating officer with Precision Scheduled Railroading expertise increases the likelihood that the embattled railroad will reach a settlement with activist investor Ancora Holdings, Wall Street analysts say.
NS on Wednesday announced that Canadian Pacific Kansas City executive John Orr would become its chief operating officer, effective immediately. Orr previously served as Kansas City Southern’s chief operating officer and earlier was senior vice president of transportation at Canadian National, where he began his career as a conductor in 1985.
The railroad also sought to shore up investor support for its management team and service resiliency strategy by releasing new financial guidance yesterday, including a goal to improve its operating ratio by 4 points this year.
Cleveland-based Ancora leads an investor group seeking to gain control of the NS board and appoint former UPS executive Jim Barber Jr. as CEO and former CSX operations boss Jamie Boychuk as chief operating officer. Ancora has been critical of Norfolk Southern’s lagging financial and operational performance, as well as CEO Alan Shaw’s response to the disastrous Feb. 3, 2023, hazardous materials derailment in East Palestine, Ohio.
Absent a settlement to the proxy battle, NS shareholders will vote on the dueling proposals at the railroad’s May 9 annual shareholder meeting. But Wall Street analysts, who wield influence with investors, say NS’s actions yesterday may have taken some wind out of Ancora’s sails.
“Norfolk Southern played a potential trump card in its battle with Ancora by hiring former CN, KCS and CPKC exec John Orr to run operations,” Vertical Research Partners analyst Jeff Kauffman wrote in a note to clients. “John Orr was one of the few successful industry operations veterans who we thought could be a difference maker and better fit for NSC than the activist slate of Jim Barber/Jamie Boychuk. By hiring Mr. Orr as its Executive Vice President and Chief Operating Officer, NSC brings in one of the industry’s most experienced operating executives to improve the railroad.”
Baird Equity Research analyst Garrett Holland agreed. “We thought NSC could benefit from more operating help, and changes provide a credible alternative to Ancora’s proposal. For that reason we think the odds of an activist settlement are now higher,” he wrote in a note to clients.
“The probability of the activist group gaining a majority of the board at NS is lower after today’s announcement, but it depends in part on how quickly Orr can improve the operations and efficiency of the network,” J.P. Morgan analyst Brian Ossenbeck wrote in a note to clients.
Not everyone was on board.
“We’re underwhelmed by what we observed yesterday … While John Orr is considered a good operator, it appears the cost to extract him from CP is notable and could have longer-lasting competitive implications, which is unfortunate in the context of the clear alternative,” Deutsche Bank analyst Amit Mehrotra wrote in a note to clients.
“The company could have hired Jamie Boychuk with no concessions, who we consider to be best suited to be the COO … given his long and successful track record,” Mehrotra wrote.
Mehrotra also raised concerns about how NS has churned through chief operating officers: Orr is the railroad’s third operations boss in a little over three years.
Some analysts were critical of the $25 million payment NS agreed to make to CPKC in order to pry Orr loose from his contract, as well as concessions NS made regarding the CPKC-NS Meridian Speedway joint venture.
The investment could pay off quickly if Orr is able to eliminate the $55 million NS is currently spending per quarter on resiliency costs, Ossenbeck wrote.
But Mehrotra questioned the potential competitive impacts of the Meridian Speedway deal, and said NS should have provided more information on what agreements it made with CPKC.
CPKC said it gained “certain operational and commercial considerations related to the Meridian Speedway and the Meridian Terminal which will expand competition and unlock additional value related to CPKC’s proposed Meridian & Bigbee Railroad (MNBR) acquisition.”
CSX and CPKC have sought regulatory approval to acquire MNBR to create a new interline route linking the Southeast with Texas and Mexico via the Meridian Speedway.
NS and CPKC declined to provide more details on the Meridian Speedway agreement.
But people familiar with the matter said NS would drop its opposition to the CSX-CPKC acquisition of Genesee & Wyoming short line Meridian & Bigbee. NS would face increased competition from CSX for traffic moving between the Southeast and Dallas via the Speedway, but would maintain its lock on transcontinental intermodal traffic that uses the Meridian-Shreveport shortcut. NS also gained a commitment from CPKC for investments in the Meridian terminal area to ease NS concerns about potential congestion.
Yesterday former CN CEO Claude Mongeau, who is on the NS board, praised Orr. Today former Kansas City Southern CEO Pat Ottensmeyer chimed in.
“John Orr is one of the most respected railroaders in the industry, with decades of hands-on experience leading successful operating plans. He was instrumental in executing a scheduled railroading strategy at Kansas City Southern that significantly improved service and productivity, and led to sustainable performance improvement,” Ottensmeyer said in a statement today. “Having worked side by side with John, I am confident that his strategic vision, steadfast commitment to safety, and deep expertise, will make him a tremendous addition to Norfolk Southern’s team.”
Ancora blasted NS’s decision to spend $25 million and give concessions to CPKC in order to hire Orr. “Based on the real and implied cost of securing Mr. Orr, who analysts and investors have told us they never heard of prior to today, the sitting directors may have signed off on one of the most expensive and overpriced hires in industry history,” Ancora said in a statement yesterday.
It was unclear which analysts never heard of Orr.
Virtually every analyst who covers the railroad industry attended the CPKC investor day in Kansas City last year, where Orr was among the presenters. He also delivered a KCS presentation at the North American Rail Shippers conference in 2022, participated in KCS quarterly earnings calls, and authored white papers on Precision Scheduled Railroading while he was a consultant.
And independent analyst Anthony B. Hatch says Orr is well known on Wall Street and Bay Street.
Note: Updated at 10 a.m. Central on March 22 to add no comment from CPKC regarding the Meridian Speedway deal.
Leave it to Tony – Always Teaching — I was Unfamiliar with the reference to Bay Street. I had to look it up! Thanks for a great and timely article Bill.
Not happy. I was prepared to vote against Ancora. Now they’ve won what they wanted: PSR. Yuck.
At least you didn’t get Jamie Boychuck who nearly ran CSX into the ground before it was “suggested” he take his talents elsewhere, an option which until Anchora came along was finding no takers. Go figure…
The 25 million buyout of Orr’s CPkc obligations was cheap insurance against the disaster that Boychuck would have been (plus Keith Creel apparently needs the money) despite what Deutsche Bank’s Mr. Mehrotra (another bank analyst akin to those at Anchora) has to say. Isn’t it prophetic that CSX abandoned all of Boychuck’s efforts the minute Joe Hinrichs took over as CEO and now has CSX on the “rails” (literally) to better service standards and higher profits?
PSR and the hedgies always win. The perverse incentives of paying executives in stock insures bad behavior. Look for more employment cuts, shuttered shops, closed yards and stored equipment. Customers can ship by truck if they don’t like the “service”.
Someday there needs to be strict operating regulations of the new Robber Barrons. History sure rhymes!
“Based on the real and implied cost of securing Mr. Orr, who analysts and investors have told us they never heard of prior to today…..”
Just because YOU don’t know him doesn’t make him unqualified. And there lies the problem with Hedge Street “insider” jobs like what Ancora is doing.
And on a side note, every time I see the word “Ancora” all I can think of is the ugly Rancor from Star Wars. Luke Skywalker stuck a bone in his mouth and he broke it, but when he baited him through the door it closed on him. Somehow I feel like the bone is in Ancora’s mouth right now, they will break it and the door will shut on them when they try to take it farther.
The Wall Street GreedMeisters never learn…short-term profits above everything else is a long-term recipe for disaster. So now it’s PSR Lite or PSR Done Better by Slightly Nicer but Still Irretrievably Stupid People?