CSX Stands Ground Against Activists

In the face of a gloomy economy where consumer spending is tepid, some of the smartest minds in the investment world have recently made big bets on the sleepy railway transporters. First it was Warren Buffett buying a big stake in Burlington Northern(BNI Quote). Bill Gates' investment vehicle also has a large stake in CN Railway. Both have been winning bets, appreciating 27% and 6% respectively in the last year.

But both of these transporters' gains have been eclipsed by Jacksonville-based CSX(CSX Quote), which has racked up a 45% increase in its share price in the last 52 weeks -- mostly coming in the last three months.

Cramer Interviews CSX Corp. CEO

While Buffett and Gates have been passive investors in Burlington Northern and CN Rail, CSX has generated this performance while battling a group of activist investors led by Christopher Hohn of London-based The Children's Investment Fund (or TCI).

You might remember Hohn teamed up with Atticus Capital in 2005 to battle the German stock exchange Deutsche Borse. The two firms adamantly protested the German stock exchange's plans to merge with the London Stock Exchange(LSE Quote). When other investors sided with this view, Werner Seifert, the CEO of Deutsche Borse at the time, quit. It was reported that Hohn had told Seifert that his investor group was so powerful that they could nominate Mickey Mouse and Donald Duck to Deutsche Borse's supervisory board (board of directors) and have them approved by other investors. Seifert later titled his memoirs Invasion of the Locusts, referring to Hohn and the others he battled against.

Hohn had an equally high-profile and successful battle with ABN Amro(ABN Quote) in 2007. He bought up a 1% stake in the Dutch bank and began to call for its sale. After ABN lined up a deal with Barclays, TCI agitated for a better price. RBS(RBS Quote) finally swooped in to buy the bank and helped deliver a 70% return for TCI for a few months of work.

With these and other successes, TCI has delivered a 41.98% three-year annualized return, making it the ninth best performing hedge fund in the world, according to Barron's. The EuroHedge Awards crowned TCI the "Fund of the Year" in 2004 and 2005. Assets swelled from $3 billion in 2004 to over $15 billion today.

But the CSX investment has also proved a challenge for Hohn. TCI went public with its criticisms of CSX last October, with a long list of complaints that were mostly governance-related. They wanted the Chairman and CEO roles split, new directors to replace those with tenures of over a decade, and asked that shareholders be able to call special meetings. They also criticized that the company wasn't managing its costs well and had under-performed its peers of late. This was true for the 12 months prior to TCI's complaints, but CSX had significantly out-performed its peers if you went back further back in time.

CSX shot back at TCI in November, rejecting its demands. Most damning to TCI in the response was that CSX brought some previously private demands TCI had made over the previous 10 months to light. According to CSX, TCI had asked CSX to do a leveraged buyout, to lever up the company with "junk" debt to fund a massive share buyback, to commit to doubling its prices to customers over the next decade and to "freeze capital spending for growth until Congress determines the outcome of an issue that has been the subject of its policy debate for more than 20 years."

But CSX didn't stop there. The company proceeded to sue TCI for improperly disclosing its actual CSX ownership that was held in SWAPs. They also successfully managed to paint TCI as an ominous foreign threat to U.S. national interests, getting local politicians to question the "aggressive" actions of Hohn and TCI.