A Canadian National Railway locomotive moves through the rail yard in Dartmouth, N.S., March 29, 2018.Andrew Vaughan/The Associated Press
Activist investor TCI Fund Management has launched a battle for control of Canadian National Railway Co. in the wake of the railway’s apparently failed bid to buy Kansas City Southern Railway Co.
TCI, run by British billionaire Chris Hohn, on Monday accused Canada’s largest rail carrier of being run by “incompetent” and “weak” leadership, and said it will soon call a special shareholders’ meeting to oust CN’s chairman, chief executive officer and other directors.
Ben Walker, a partner in TCI, said the hedge fund is winning support from other major CN shareholders in its campaign for control of the railway’s boardroom. “The arguments are overwhelming,” Mr. Walker said in an interview. “Other shareholders are telling us they agree with us. They are reaching out to us.”
TCI’s move comes after KCS said Saturday it would renew takeover talks with CN rival Canadian Pacific Railway Co., reversing an earlier agreement to be bought by CN.
CN’s offer is in doubt after the U.S. railway regulator last week blocked a key part of CN’s takeover. The U.S. Surface Transportation Board rejected the Montreal company’s proposal to form a voting trust that would hold KCS’s shares pending approval of the takeover itself.
“The bid for KCS reflects poorly on CN’s management and board because it was obvious from the beginning that the bid would fail,” TCI said in a news release. “It was a copycat bid that reflected a defensive motivation and lack of strategic thinking.”
CP Rail reaffirms Kansas City Southern offer, gives U.S. rail carrier until Sept. 12 to accept
Mr. Walker decried the lack of railway experience on CN’s board, and said the company risked paying termination fees of as much as $2-billion by pursuing a takeover that had no prospects of U.S. regulatory approval.
TCI aims to replace “at least” five of CN’s 11 directors, including chairman Robert Pace and CEO Jean-Jacques Ruest, Mr. Walker said. “We need that number to effect change,” he said, calling it “shocking” Robert Phillips is the only board member with any experience in the rail industry, other than the CEO.
Mathieu Gaudreault, a CN spokesman, did not address questions about the KCS bid, the future of the company’s leaders or whether CN would negotiate with TCI to avoid a vote on board membership.
“CN values input from all of our shareholders,” Mr. Gaudreault said. “As we have done throughout the KCS process, and as we always do, we will make carefully considered decisions in the interest of all of our shareholders and stakeholders and in line with our strategic priorities.”
CP CEO Keith Creel said last week its US$27-billion bid for KCS expires on Sept. 12. The Calgary-based railway has already won STB approval for its voting trust.
Jason Seidl, a stock analyst at Cowen and Co. in New York, said it is possible CN will raise its offer to win KCS shareholder support without a voting trust. However, “we believe it is in CN’s best interest to walk away from the deal, given the clear messaging from the STB.”
KCS agreed in May to CN’s US$29.8-billion offer, turning its back on a March agreement with CP worth about US$25.2-billion. CP raised its bid by US$2-billion in August, arguing its proposal was the only one that would receive approval from U.S. regulators.
TCI is CN’s second-largest shareholder, with more than 5 per cent of the outstanding shares, a stake worth about $4-billion. TCI is also the largest owner of CP shares, at 8 per cent.
CN’s largest shareholder is Bill Gates’s Cascade Investment LLC. Mr. Walker said he has not discussed TCI’s Tuesday announcement with Cascade. He declined to say whether he supported CN director Justin Howell, who works for the Bill & Melinda Gates Foundation Trust. “I don’t know him,” Mr. Walker said.
A call to Cascade was not returned. CN’s major shareholders have declined to comment or not responded to questions.
TCI, also known as Children’s Investment Fund Management, was founded by Mr. Hohn in 2003 and has more than US$40-billion in assets under management. In 2008, the hedge fund joined with 3G Capital Partners to upend the board at U.S. railway CSX Corp., replacing four of 12 directors.
The investors accused CSX of poor management and lagging financial performance. CN is facing similar accusations.
TCI recently raised its stake in CN to be able to call a special meeting of shareholders. In a presentation it sent to CN’s board, TCI said CN is the only major railway in North America that has not increased operating profit since 2016.
CN’s operating ratio, a gauge of expenses versus sales that is closely watched by railways and investors, has fallen to the industry’s worst from the best since 2017. Since 2016, CN’s revenue has risen by 1.4 per cent, while expenses have increased by 18 per cent. “CN is the only railroad that remains below prepandemic levels on all key metrics,” TCI said.
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Eric Atkins