Activist, CSX May Be Closing in on a Deal to Bring Veteran Railroader On Board
Ex-CP CEO, Hunter Harrison

Activist investor Mantle Ridge's Paul Hilal may be closing in on a deal to put railroad veteran Hunter Harrison in as CSX  (CSX) CEO.

The insurgent investor, who's been hounding CSX for weeks, offered a compromise proposal late Thursday that he hopes will eliminate the need for a soon-to-be-scheduled shareholder vote on the matter.

"We are close," said Hilal in a note to the CSX board. "We owe it to the shareholders to get a deal done promptly."

Hilal, an ex-partner at activist fund Pershing Square Capital Management, recently joined forces with Harrison, who last month quit from his position as Canadian Pacific Railway  (CP) CEO. The duo, together with Pershing Square's Bill Ackman, are well known for engineering a spectacularly successful insurgency in 2012 that led to Harrison's installation as CP CEO and a turnaround that led CP's Toronto-based shares to climb nearly 190% during his tenure.

Now, Mantle Ridge and Harrison have been negotiating with CSX to bring Harrison in as its CEO. However,  the two sides had been squabbling over the length of Harrison's contract, his compensation and the number of new dissident directors that would be installed on the railroad giant's board.

With the latest proposal, it looks increasingly likely that Harrison will become the next CEO of the Jacksonville, Fla.-based railroad. The only big questions that remain involve ones around the length of his contract and how many dissident directors will join him.

"Of course Harrison will become CEO," said Jeffrey Kauffman, research analyst at Aegis Capital Corp. and a 27-year-veteran of covering the railroad sector. "The letter shows Mantle Ridge are willing to be flexible but they are also laying the rationale for why they want a longer tenure for Hunter to make sure he has the time and support to do what he wants to do. They are willing to give a bit on the number of directors they are seeking."

In the late Thursday letter, Hilal said that if the board could agree to a four-year contract for Harrison he would agree to a deal that only involved the installation of himself, Harrison and three other directors to what would be a reconstituted 14-person board. Hilal's previous proposal had sought six seats on the CSX board, including seats for himself and Harrison.

Hilal sought to separate himself from the directors he had suggested should join him on the CSX board, arguing that none of the nominees have any special relationship with him and all are independent directors. 

Some directors could be good targets for Hilal. The company's current 12-person board has at least six non-executive directors that have served for terms of more than 10 years, according to relationship mapping service BoardEx, a service of TheStreet. Institutional Shareholders Services gave a red flag to CSX in its QualityScore report, obtained by The Deal, for its board, noting that 55% of its non-executive directors have lengthy tenures."

The activist fund said he presented CSX with 11 "exceptional individuals" to choose from and that the new blood on the board will help oversee and implement an operating approach Harrison pioneered -- and is famous for -- known as precision scheduled railroading, a strategy that allows the railroad company to schedule shipments in a precise way by knowing how trains move between customers and interchanges.

In response, CSX said it would consider the latest proposal. If the two sides can't reach an agreement, the next step would be for CSX to move ahead with its proposed special shareholder meeting to seek guidance from investors about whether to support Mantle Ridge's proposals. That meeting could take place as soon as April, according to Hilal, or later. "None of us wants to wait," Hilal said. 

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