Norfolk Southern-Ancora Holdings proxy battle accelerates

Battle lines continue to be drawn in the proxy bout and attempted management takeover of Atlanta-based Class I railroad carrier Norfolk Southern by activist investor Ancora Holdings LLC.

Ancora has stated that NS is not committed to fully implementing Precision Scheduled Railroading (PSR), created by the late CSX President and CEO E. Hunter Harrison, whom passed away in December 2017. PSR requires cargo to be ready when rail cars arrive for loading or risk being left behind, a practice that served both CP and CN well under his leadership, with both companies seeing multiple positive results in the form of lower operating ratios, improved service, record amounts of reinvestment into networks, as well as creating significant shareholder value.

To that end, Ancora has said it is focused on what it views as a more efficient and effective leveraging of PSR, focusing on service, cost control, asset utilization, safety-first culture, and human capital. Addressing its proposed management team, the company said that the new team would pursue a balanced and safe strategy focused on improved safety, improved service, improved performance, stronger growth, and improved sustainability.

And earlier today, proxy advisory services company Glass Lewis threw its support behind Ancora’s proposed PSR implementation and its proposed slate of the NS Board of Directors, adding that Ancora “presented a compelling case” for a substantial overhaul of NS’s current leadership.

For the former, Glass Lewis cited how Ancora made the case that NS could gain roughly $800 million in savings by taking various actions, including: removing 450 locomotives, for a projected savings of $165 million; taking 35,000 freight cars offline, for a projected savings of $250 million; reducing fuel per gross ton mile to 0.95 gallons, for a savings of $200 million; and realizing efficiency gains from a network redesign, for a savings of $185 million), with these measures lowering NS’s operating ratio to 62%-to-63%, which would put it in line with the industry average of 62.6%.   

For the latter, Ancora is calling for the removal of NS President and CEO Alan Shaw; Amy Miles, independent chair of the board (former CEO of Regal Entertainment Group); Claude Mongeau (renowned railroad executive and former CEO of Canadian National); Jennifer Scanlon (current CEO of UL Solutions Inc., a leading global safety science organization, and former CEO of USG Corporation); and John Thompson (former senior executive and director at multiple customer-facing publicly traded companies, including Best Buy Co., Inc.).

“It is this cohort of extremely talented and experienced directors that Ancora would have shareholders dismantle and replace with inferior nominees who the board has determined lack the necessary qualifications to serve on the board,” said NS in late March. “They are being put forward solely as part of Ancora's campaign to remove management and take control of the board to implement Ancora's ill-conceived and reckless strategy. Ancora's attempt is not only unwarranted, it would introduce significant risk to our strategy and result in value destruction for our shareholders.”

Glass Lewis also said that Ancora’s choices of former UPS COO Jim Barber to replace Shaw as CEO and former CSX EVP of Operations Jamie Boychuk as COO to replace John Orr, whom recently came over to NS from CPKC, each have compelling credentials and track records.

What’s more, earlier today, Ancora garnered railroad union support from the Brotherhood of Locomotive Engineers and Trainmen (BLET), with the unions general chairs representing NS BLET members calling out NS’s Shaw for “backsliding” on the company’s earnings call last week. Which BLET said led to its three General Chairmen representing NS engineers and trainmen to have talks with Ancora about Ancora’s future vision for NS, should NS be successful in securing control of the NS board of directors.

“BLET entered into a memorandum of understanding that, if Ancora is successful, ends the practice of forcing engineers to work as conductors; offers new seniority protections; gives the BLET a seat at the table in the training of all new hires; tightens up the scope rule on ‘Road Service’ to require that any trains operating more than five miles outside the yard be operated by an engineer whether they are operated by conventional or remote controls, and that within rail yards, only an engineer will operate conventional controls on trains,” said BLET. “These are only a few of the items addressed in the agreement reached that will benefit BLET members and boost rail safety.”

BLET was not the first union to support Ancora. Last week, the Brotherhood of Maintenance of Way Employees Division of the International Brotherhood of Teamsters (BMWED-IBT) did the same, stating a change in leadership at NS is necessary.

“The BMWED-IBT, after more than a year of non-committal hedging on reasonable, needed changes and untenable shakiness in management at Norfolk Southern, has determined that a change in leadership is needed for the freight rail carrier and its employees,” said Tony Cardwell, President of BMWED-IBT, in a statement. “Following yesterday’s earnings call and a reasonably constructive meeting with a potential new leadership team, our Brotherhood has determined that a change at the top would be the best course of action for BMWED-IBT members. For many months since East Palestine, the BMWED has not been able to get assurances from the current leadership to implement needed policy and procedural changes to prevent such tragedies from reoccurring.”

BLET and BMWED collectively account for 41.5% of NS’s union workforce, said BLET.

NS blasted the MoU between Ancora and BLET, saying that Ancora lacked the authority or authorization to do so and calling it a unauthorized agreement pu which purports to offer specific concessions by Norfolk Southern to the BLET in exchange for the BLET's support of Ancora's attempt to gain control of the company's board.

“Ancora's actions are a blatant attempt to buy votes through backdoor deals to take control of the company,” said NS. “This desperate effort by Ancora, if successful, provides concessions to the BLET that limit operational flexibility and destroy significant value for the company. 

Aside from violating the Railway Labor Act rules that grant exclusive negotiating authority to representatives of Norfolk Southern, Ancora has demonstrated that its own nominees are not independent and are beholden only to Ancora. Clearly, Ancora is willing to take any steps to get its nominees elected to the board, including making unauthorized commitments to Norfolk Southern's employee unions to cover up its own management candidates' abhorrent track record with labor.”

In another related development, a Bloomberg article said that one of NS’s largest customers, steel producer Cleveland Cliffs supports Ancora’s efforts.

Citing a letter written to Ancora by Lourenco Goncalves, CEO of Cleveland-Cliffs, he said that Cleveland Cliffs believes in shareholder activism when the activist has a plan and knows how to execute the plan, adding that the outcome of the proxy fight will have no impact on its customer or supplier relationship with Norfolk Southern.

The proxy battle’s outcome will be decided at the railway's May 9 annual meeting unless the two sides reach an agreement first, according to Reuters.

TD Cowen analyst Jason Seidl wrote in a research note that, while Glass Lewis issued its opinion this week, a separate one is expected from proxy firm ISS later in the week.

“We see Monday's [Glass Lewis] news as more momentum in favor of the activist,” wrote Seidl.  “While other stakeholders have come out in support of the activist over the weekend, including BLET and large customers, these groups are not the ones voting on May 9 (with significance), though headlines could sway shareholder opinions. If ISS comes out in favor of Ancora, we believe this could make it much more difficult for current management to win the shareholder vote next week. That said, there have been times in the past where shareholders vote against the opinions of proxy advisory firms.”