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Basch Report
Jax Daily Record Tuesday, Dec. 26, 201707:00 AM EST

CSX Corp. stock gains far exceeded $84 million paid Hunter Harrison

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Executive’s legacy: A company worth billions more than when he took over.
by: Mark Basch Contributing Writer

As financial news outlets last week examined the legacy of Hunter Harrison’s brief tenure at CSX Corp., you probably saw headlines reminding everyone that shareholders paid him $84 million for what turned out to be nine months of work.

Harrison received that money as compensation for payments he forfeited when he left his previous job at Canadian Pacific Railway Ltd. 

The contracts CSX filed in Securities and Exchange Commission documents don’t show any provisions for Harrison’s heirs to repay any of that $84 million. 

However, while it seems like a ridiculous amount of money for a short term as chief executive officer, many CSX shareholders probably would still say it was money well spent.

CSX’s stock did fall Dec. 15 after the company announced Harrison was taking a medical leave. But on Dec. 18, the first trading day after Harrison’s death, the stock closed at $53.59, 45 percent higher than its price in January when word surfaced that Harrison was seeking the CSX job.

Harrison’s track record of improving operational efficiency at railroads, while acrimonious to employees who faced job losses, was cheered by Wall Street, sending the stock up even before he was hired.

While the $84 million payment was subject to a shareholder advisory vote, several analysts pointed out stockholders would approve because the value of CSX’s stock rose by billions. The measure was approved by 90 percent of shares voted at the company’s June annual meeting.

CSX has nearly 900 million outstanding shares, so every $1 increase in the trading price increases its market value by $900 million.

As of Dec. 18, CSX’s market value was $14.9 billion higher than it was when the Harrison rumors began in January.

You may wonder if CSX’s stock gains were just part of the overall market gains this year. But the Dow Jones transportation average (an index which includes CSX) rose 15 percent from mid-January through last week, a third of the gain for CSX’s stock in that period.

Not everyone will remember Harrison’s tenure fondly. Reports filed with the U.S. Surface Transportation Board show that CSX cut about 2,000 jobs from April through November in its operations, which cover most of the eastern U.S.

The company also cut 951 management-level jobs this year, mostly in Jacksonville, but that plan was announced in February, before Harrison was hired.

CSX customers also have been unhappy as implementation of Harrison’s new operating system caused service disruptions and complaints from freight customers.

Ironically, the STB sent another letter to Harrison on Dec. 14 requesting an update on the status of the operating plan.

“The Board continues to hear concerns related to CSX service challenges or inadequate service, particularly about unsatisfactory ‘last mile’ performance and lack of communication regarding changes to service before they occur,” the letter said.

However, nobody is hearing complaints from shareholders.

One analyst downgrades CSX

Although many analysts speculated about CSX’s future after Harrison’s death, only one changed her rating on the stock last week.

Cherilyn Radbourne of TD Securities downgraded CSX from “buy” to “hold.”

Jim Foote is the acting CEO of CSX.

“Mr. Harrison’s leadership was a key element of our investment thesis,” Radbourne said in her research note.

Chief Operating Officer James Foote was named acting CEO when Harrison’s medical leave was announced. The company was strangely silent about management succession most of last week but on Friday, it named Foote as permanent president and chief executive officer.

Foote, who was hired by CSX at the end of October, was a former colleague of Harrison’s in a previous stop at Canadian National Railway Co. and had been speculated as a successor, so Friday's announcement was no surprise.

Foote, who was hired by CSX at the end of October, was a former colleague of Harrison in a previous stop at Canadian National Railroad and had been speculated as a successor. However, CSX did not say if it was launching a search for a new CEO.

“We believe that Mr. Foote’s presence in the senior leadership team provides an important source of continuity, as he is intimately familiar with Precision Scheduled Railroading, and is capable of leading the cultural change that needs to accompany the operational changes,” Radbourne said in her research note.

“However, our biggest concern is that Mr. Foote’s primary area of expertise is sales and marketing vs. operations, and the senior management team now lacks a member with an operating background.”

While the executive suite may be lacking experience, “the operating team has been augmented with about 12 external recruits deployed to key roles, and Mr. Harrison had already mentored about 150 mid-level employees through ‘Hunter camps,’ ” Radbourne said.

Most analysts didn’t change their ratings because of optimism that CSX can continue to implement the new operating plans that Harrison already put in place. But CSX will remain under close scrutiny in 2018.

Dick’s Wings parent details Jaguars deal

ARC Group Inc., parent of the Dick’s Wings and Grill restaurant chain, announced a sponsorship agreement last week that makes Dick’s the official chicken wings of the Jacksonville Jaguars.

Businesses that sign sponsorship deals with pro sports teams — including public companies — don’t often reveal financial details of the agreements. However, for a relatively small company like ARC Group, the Jaguars deal apparently is big enough to be considered material, so it disclosed the contract details in an SEC filing.

The agreement calls for ARC Group to pay a fee of $200,000 to the Jaguars next year, with the annual fee increasing to $216,490 for the 2022 season, the fifth year of the deal.

The company will pay more if the Jaguars make the playoffs in those years.

That’s a significant expense for a company that reported revenue of $3.23 million and operating expenses of $3.15 million in the first nine months of this year.

In addition to the annual fee, the company will provide the Jaguars with food and beverages from Dick’s Wings restaurants equal to $35,000 in the first year, rising to $37,890 in the fifth year.

Other provisions of the agreement include stadium signage for Dick’s Wings and radio advertisements during Jaguars programming.

ARC Group also gets four seats in Section 150 of EverBank Field for Jaguars’ games. Those seats are in the South End Zone.

Australian investor sells ACFC stake

An Australian investor who helped defeat a proposed 2013 buyout of Atlantic Coast Financial Corp. sold off his shares last month after Atlantic Coast Financial announced a new merger agreement.

Seamus Dawes and his Australian investment firm, Albury Investment Partnership, sold about 1.3 million shares Nov. 22 at an average price of $9.22 each, according to a Securities and Exchange Commission filing last week.

That sale came five days after Ameris Bancorp announced an agreement to buy Jacksonville-based Atlantic Coast Financial for about $9.43 a share in cash and stock.

Albury had been one of Atlantic Coast Financial’s largest shareholders, with 8.5 percent of the stock.

Albury was Atlantic Coast Financial’s largest shareholder in 2013 when the company agreed to merge with Bond Street Holdings Inc., a South Florida banking firm. 

Dawes and several other large shareholders opposed that deal, which would have paid Atlantic Coast Financial stockholders $5 per share. The deal was rejected at a special shareholders meeting in June 2013 and led to a shake-up of Atlantic Coast Financial’s management.

Albury’s filing last week said it sold its Atlantic Coast Financial stock in the open market, but gave no other details about why it decided to sell now.

Ameris, which has its executive offices in Jacksonville, hopes to complete its acquisition of Atlantic Coast Financial in the second quarter of 2018.

Titanic artifact sale postponed

The owner of 5,500 artifacts from the RMS Titanic filed a motion in U.S. Bankruptcy Court in Jacksonville to postpone a planned February auction of its assets.

Premier Exhibitions Inc. intends to sell its business in a court auction to settle its Chapter 11 case.

Premier filed a Chapter 11 reorganization plan on Dec. 14 that calls for the sale of its assets.

However, several parties objected to the process.

“Uncertainty surrounding the timeline for resolution of the issues raised by those parties led Premier to withdraw the sale procedure motion to allow the company an opportunity to develop a path forward in discussions with stakeholders including the company’s equity and debt holders,” the company said in a news release.

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