Last month Hunter Harrison stepped down from his position as CEO of Canadian Pacific Railway  (CP) to join Mantle Ridge, a newly formed activist fund led by Paul Hilal.

An ex-partner at activist fund Pershing Square Capital Management, Hilal mostly engineered a spectacularly successful insurgency in 2012 at CP that installed Harrison as CEO, orchestrating a turnaround there that led CP's Toronto-based shares to climb nearly 190% in his tenure.

Together Hilal and Harrison are targeting CSX, which on Tuesday evening said it was calling a special shareholder meeting to seek guidance from investors about whether to support Mantle Ridge's proposals. The activist fund wants six seats on a reconstituted 14-person CSX board and Harrison in as CEO. Also, the activists want three incumbent directors to resign at the 2017 annual meeting and one more to step down in 2018.

CSX's counteroffer: a job for Harrison as CEO and director, and board positions for Hilal and three other "mutually agreed" upon directors. The two sides appear to be squabbling over Harrison's compensation and how many board seats Mantle Ridge would have control over.

Nevertheless, it looks increasingly likely that Harrison will become the next CEO at the Jacksonville, Fla.-based railroad. If a majority of shareholders back Mantle Ridge's proposals, look for CSX to abide or face a change-of-control proxy contest. 

Jeffrey Kauffman, an analyst at Aegis Capital and a 27-year-veteran of covering the rail sector, argues that CSX may not have a lot of leverage when it comes to negotiations with Harrison and Mantle Ridge, especially since all the railroad's directors are up for election annually. "If Mantle Ridge were to propose its own slate of directors to change the entire board then shareholders would most likely support them," Kauffman said.

Donald Broughton, an analyst at Avondale Partners, said he doesn't expect Harrison and Mantle Ridge to accept any fewer than six director slots, in part because the activist team wants to give Harrison as much flexibility as possible. "They want a board that will let Hunter do what he does," said Broughton. "If he wants to fire everyone in the C-Suite or shut down a yard or weather a strike with unions, they want him to have that power. Hunter is a force of nature."

With Harrison in charge, look for a focus first on operating improvements and buybacks, only later followed by M&A. Broughton said he believes that Harrison would take his first 18 months in charge and seek to improve CSX's record when it comes to picking up and delivering cargo on time. The Harrison method would focus on an approach he pioneered - and is famous for -- known as precision railroading, an operating strategy that allows the railroad company to schedule shipments in a precise way by knowing how trains move between customers and interchanges. "CSX isn't sweating the asset the way he would try to sweat them," Broughton said.

Kauffman agrees that Harrison, should he get the CEO position, will take the next couple years to turnaround the railroad giant. Only after that would he likely consider M&A. "I don't see a deal proposed for two years. They have got to recreate CSX first," Kauffman said.

Kauffman notes that CSX doesn't have a lot of leverage, when it comes to negotiations with Harrison and Mantle Ridge, especially since all of the railroad's directors are up for election annually. "If Mantle Ridge was to propose its own slate of directors to change the entire board then shareholders would support them," Kauffman said.

Activists like Hilal's past employer, Pershing Square, often push for capital distributions. As a result Kauffman also expects about 18 to 25 cents a share in stock buybacks over the next four years if Harrison and Mantle Ridge succeed.

However, most interested observers following the railroad industry agree that at some point Harrison will make a consolidation play, even if his effort doesn't ultimately succeed. Kauffman says he doesn't think it's about the money for Harrison. "It's more about legacy. He wants his legacy to be the guy that drove railroad consolidation. I expect him to try, but I don't know if he will succeed."

A key goal for Harrison's M&A approach, observers say, is to expand his precision railroading approach to a broader set of railroads. "You can only apply precision railroading to your business. You can't apply it to other railroads you are connected to," Broughton said.

It is a real possibility that Harrison would seek to combine CSX with Canadian Pacific down the road. Kauffman notes that both Hunter and Keith Creel, a Hunter protege who is currently CP's CEO, have similar mindsets when it comes to M&A. However, a standstill agreement signed by Hunter upon his departure from CP prohibits him from pursuing a combination with CP for three years. "It's very possible that Harrison and Creel each pursue separate deals," Kauffman said.

Alternatively, Kaufman suggested that CSX could seek to combine with either the Burlington Northern or Union Pacific  (UNP) railroads. "What I think they want to do is create an east-west transcontinental railroad," Kauffman said.

If a deal can be done, the most likely acquisition candidate that would overcome regulatory objections would be Kansas City Southern  (KSU) , a railroad whose stock was battered upon the Trump election over fears around its Mexico operations in the wake of speculation around the new administration's plan to renegotiate the North American Free Trade Agreement.

Nevertheless, a major deal, such as a CSX-Union Pacific merger, could face significant regulatory hurdles, particularly with the Surface Transportation Board, which writes rules governing railroad mergers. Furthermore, because of the size of the deals, these transactions would likely be structured as equity combinations requiring shareholder approval, another hurdle.

For now, however, Harrison and Hilal await the verdict of shareholders - a vote of confidence from could put CSX on a course for M&A in the years ahead.

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