An activist investor group has taken a $1 billion stake in Norfolk Southern and aims to wrest control of the company’s board and oust CEO Alan Shaw, according to a report in The Wall Street Journal this evening.
The investor group, led by Cleveland-based Ancora Holdings, has nominated a slate of directors that includes former Ohio Gov. John Kasich and former Canadian National and Kansas City Southern executive Sameh Fahmy, according to the report.
They have met with NS officials and discussed their disappointment with the way the railroad responded to the Feb. 3, 2023, derailment and hazardous material spill in East Palestine, Ohio, and the company’s failure to meet financial targets, the Journal reported.
NS said it would continue to act in the best interests of its shareholders.
“The Norfolk Southern board and management team regularly engage with shareholders and take their perspectives seriously. We are committed to acting in the best interests of the company and our shareholders as we continue to execute our strategy to balance safe, reliable service, continuous productivity driven by our precision scheduled operating model, and the pursuit of smart, accretive growth,” a railroad spokesman said today.
Ancora representatives did not immediately return an email seeking comment.
Costs related to the East Palestine derailment have topped $1.1 billion, NS said last week, and have been a drag on the company’s earnings. The main line outage in East Palestine, subsequent derailments, and temporary restrictions NS put on train length last year snarled the railroad’s operations.
The post-derailment service problems also raised costs and hurt revenue as shippers diverted business to trucks and rival CSX. NS operations and service recovered late in the year, however, and its intermodal volume grew in the fourth quarter as the railroad delivered its best intermodal on-time performance in more than three years.
Shaw, who became chief executive in May 2022, inherited a railroad with widespread crew shortages that led to significant and prolonged service problems. After a conductor hiring spree, NS operations recovered in late 2022.
And in December 2022 Shaw unveiled a long-term strategy called “a better way forward” that revolves around not furloughing train crews during downturns so that the railroad has the resources to capture volume and maintain service when freight volume recovers. Keeping train crews on the payroll during freight downturns would hurt the operating ratio over the short term, Shaw warned. But it would pay off in the long run, he said, by allowing the railroad to maintain service levels. That, in turn, would enable shippers to build more of their supply chains around the railroad, which would bring NS new traffic, higher revenue, and bigger profits.
Analysts initially welcomed the strategy. But some investors began to lose patience with NS during the third quarter, when the railroad’s operating income sank 41% and revenue was down 11%. Fourth quarter results, announced last week, also were a disappointment as costs remained elevated and profits were down again.
Norfolk Southern’s stock price is down 1.8% since Shaw took over, while CSX’s stock price is up 12% over the same span.
Activist investors have had success recently in changing railroad management.
Soroban Capital Partners in February 2023 recommended that Union Pacific replace CEO Lance Fritz with former CN and UP Chief Operating Officer Jim Vena. Vena became CEO in August.
After CN failed to give up its bid to acquire KCS in 2021, the London-based TCI Fund touted Vena as a replacement for CN CEO J.J. Ruest. Vena backed out during the selection process, and CN ultimately reached a settlement with TCI regarding board seats. Tracy Robinson, a former Canadian Pacific executive, became CEO in February 2022.
In March 2017, former CN and CP CEO E. Hunter Harrison became the chief executive at CSX after a proxy battle launched by hedge fund Mantle Ridge.
Mantle Ridge’s founder, Paul Hilal, had been instrumental in bringing Harrison out of retirement in 2012 as part of Pershing Square’s proxy fight that successfully ousted Canadian Pacific CEO Fred Green and a majority of the railway’s board of directors.
Independent analyst Anthony B. Hatch, responding to speculation earlier this month that activist investors may take a run at NS, noted that a proxy contest would be unlike those at UP, CN, CSX, and CP..
“As far as I know, E. H. Harrison is unavailable, and his known acolytes (Creel, Vena, Cory, et al) are otherwise engaged,” Hatch said. “There may be some barbarians massing at the gate, but I see no white knight on the horizon, ready to cross the Rubicon.”
Note: Updated at 1:25 p.m. Central with statement from Norfolk Southern.
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