CHICAGO -(Dow Jones)- Overseas investors targeting U.S. transportation operators typically receive a rough ride in Congress. The Children's Investment Fund, or TCF, can expect similar treatment when its 10-month pursuit of CSX Corp. (CSX) comes before a House committee on Wednesday.
The London-based activist fund has a 4.2% stake in the third-largest U.S. railroad operator, and is pushing CSX to take a new strategic track. The fund wants operational improvements and proposes replacing five of the 12 CSX directors with its own nominees.
Snehal Alin, a founding partner in TCF, will testify before the committee in what Stephen Brown, analyst at Fitch Ratings, noted was a rare move for a hedge fund. Michael Ward, chairman and chief executive of CSX, will also testify, and has so far rejected TCF's advances.
Their testimony and questioning before a previously-scheduled hearing of the House Subcommittee on Railroads, Pipelines, and Hazardous Materials is expected to focus more on TCF's potential impact on that infrastructure than the effect on a single company.
"If CSX were to be subject to a consolidation or (leveraged buyout), it could disrupt service to many of its shippers and impose an unacceptable impact to the U.S. economy," according to a staff memo dated Monday prepared in advance of the hearing.
Fitch's Brown said that any attempt to trim investment across the industry would be politically sensitive. Years of underinvestment led to a capacity crunch in 2004 when demand picked up. "What the industry is doing now is get ahead of expectations...using significant free cash to meet future demand," he said.
TCF is expected to tell the subcommittee that it has no intention of pursuing any "slash and burn" tactics, and to highlight the rail industry veterans it has brought in for its alternative slate of directors.
The fund's move has stirred a debate at a time when the railroad industry is also seeking to fend off a threat of re-regulation and to manage rising demand and fuel prices.
CSX has already responded with a raft of shareholder-friendly measures, including a $3 billion share buyback program. Its operational performance has improved after lagging peers during the recent renaissance in the industry's fortunes. "They have done a tremendous job of turning things around," said Brian Studioso, sector analyst at CreditSights.
Shares of CSX are up about almost 11% this year and have risen nearly 35% over the last 12 months, although shares have slipped about 8.6% since reaching a 52- week high last week. Shares recently traded down 18 cents to $48.72.
The U.S. railroad industry remains on a roll, despite the softening domestic economy. Imports and agricultural exports have filled capacity, providing operators with pricing power and boosting profits and investment in aging infrastructure.
Studioso said while TCF's proposed improvements "sound good on paper," there remain concerns it will seek to leverage the CSX balance sheet and cut capital expenditure. "Going down to junk status to appease shareholders isn't a good long-term strategy," he said. "If (capital expenditures) get cut, we're going to see quality of service and safety go down. That's the sort of thing regulators will fix on."
TCF is viewed as a politically savvy operator, and has already emerged as the poster child for hedge fund activism in Europe, with successful high-profile campaigns involving Deutsche Borse AG (DB1.XE) and ABN Amro (ABN).
TCF blocked the German exchange operator's planned takeover of the London Stock Exchange (LSE.LN), leading to the ousting of its CEO. It pushed for a breakup of ABN Amro, a move which led to a contested takeover battle for the Dutch financial services group ultimately won by a consortium led by RBS Group ( RBS).
CSX is its first major foray in the U.S., and company officials are conscious of Congressional sensitivity surrounding "sensitive" U.S. infrastructure.
The Jacksonville, Fla., company operates a 21,000-mile rail network across the eastern United States, one of only four Class 1 railroads which emerged from industry consolidation at the end of the last century.
Foreign investment in U.S. airlines, oil companies and port operators have all come in for criticism in Congress in recent years - notably in the controversy surrounding Dubai World Ports forced divestiture of U.S. container ports. Observers expect CSX to arouse similar passions.
Todd Malan, president of the Organization for International Investment, an advocacy group for foreign investors in the U.S., said lawmakers should be wary of putting restrictions on foreign shareholders, lest U.S. investors come in for the same treatment abroad.
"The United States has never been an advocate of silent investors," said Malan. "It's a little goofy to suddenly be shocked that a foreign fund is articulating its view and trying to exercise its voting rights."
-By Doug Cameron, Dow Jones Newswires; 312-750-4135; doug.cameron@dowjones.com
-By Martin Vaughan, Dow Jones Newswires; 202-862-9244
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