News / Sniping starts as battle for control of Norfolk Southern Railway heats up

Photo: © Jonathan Weiss | Dreamstime.com

Norfolk Southern Railway’s (NS) management and activist investor Ancora Holdings, trying to oust it, are sniping at each other via public statements and letters to shareholders in the run-up to the annual meeting on 9 May.

In early February, Ancora, which has amassed about $229m in NS shares, proposed seven candidates for the board from its own ranks, including replacements for CEO Alan Shaw and COO John Orr, claiming this could could drive up the NS share price by 65%, to $420.

This week, NS took the unusual step of unveiling its preliminary first-quarter results, ahead of the official release on 24 April, noting volumes up 4%, while revenues declined 4%, to $3bn, which management attributed to lower fuel surcharges and a less profitable mix of freight.

NS’s preliminary adjusted earnings would be at $2.49 a share and adjusted operating ratio at 69.9%.

These numbers fall short of Wall Street’s expectations of $2.59 earnings per share and an operating ratio of 69%. But they do include the impact of a proposed $600m settlement of a class action suit, related to the derailment and chemical spill in East Palestine last year, which is subject to court approval.

Including the settlement, operating income fell 70%, to $213m.

Mr Shaw stressed that the operating ratio had improved each month in the quarter and promised more improvement, toward 400-500 basis points up in the second half of the year.

He and his fellow board members have adopted a high profile to fend off the challenge from Ancora. In addition to speaking to financial analysts, they have written to shareholders emphasising their efforts to drive improvements, make management accountable, their responsiveness to shareholder feedback and the plan to advance safety and operating performance.

They also pointed to the recent appointment of rail veteran John Orr as COO, who, according to Mr Shaw, “is executing precision scheduled railroading (PSR) principles and accelerating our operational improvements, which are already yielding positive results”.

PSR has been widely blamed for deterioration in rail carrier performance and massive layoffs, and is equated with an excessive focus on profits to the detriment of performance and safety. That Mr Shaw mentions efforts in this vein suggests the board is worried that Ancora’s association with the strategy – its proposed COO, Jamie Boychuk, was a disciple of PSR pioneer Hunter Harrison and went on to implement it at CSX – may chime with shareholder sentiment.

One financial analyst has commented that NS was set to change course regardless of which side prevails in the shareholder vote next month, arguing that the incumbent board is facing pressure to do so.

In the war of words, Ancora has fired back, attacking the appointment of Mr Orr in a letter to shareholders. It also claimed asset management firm Neuberger Berman had thrown its support behind its push to replace the management.

In return, the NS leadership argues that Ancora’s proposed executives lack adequate experience, and its objectives constitute a short-term focus that would put the rail franchise at risk.

The lower-than-expected Q1 results will not delight shareholders, but it remains to be seen if this is enough to make them endorse Ancora. Wall Street analysts at RBC Capital and Susquehanna did not change their outlook for NS after the numbers were announced.