CSX sues hedge fund, issues strong earnings guidance
CSX Corp. said Monday it has filed suit against two activist hedge funds for trying to disguise their collaboration to vote CSX shares against the railroad’s management, claiming the practice violates federal securities laws.
Jacksonville, Fla.-based CSX is fighting back against year-old efforts by The Children’s Investment Fund to raise CSX’s financial performance through increased stock buybacks, replacing board members, raising rail rates on shippers, and freezing capital investment. TCI said it has bought 11.5 percent of the CSX stock. Also named in the lawsuit is 3G Capital Partners.
The suit filed in the U.S. District Court for the Southern District of New York alleges TCI has used swap agreements to avoid requirements for filing stock purchases with the Securities and Exchange Commission. Swap agreements are complex financial transactions in which the parties agree to “swap” cash flows from their respective assets. CSX claims that TCI used the swap arrangement to influence 3G to vote its shares in favor of TCI’s agenda.
CSX said the stock partnership was an attempt to mislead the SEC, which requires a person or group to disclose within 10 days whenever it acquires more than 5 percent of any class of a company’s shares and any other person who has voting power or the power to sell the security. “Therefore, material information that the investing public should have regarding the group and its intentions with respect to the company is currently unavailable,” CSX said in a statement.
CSX announced that it has postponed its annual shareholders meeting until June 25 in New Orleans in order to allow for shareholders to receive complete information about the group’s holdings, plans, agreements and motivations, and to pursue the lawsuit.
“By virtually all measures the performance of CSX has been exceptional. Notwithstanding this, in an effort to avoid the disruption and expense of a proxy contest we’ve spoken with TCI on a number of occasions in an attempt to find common ground. Based on these conversations the board concluded that TCI is not simply interested in having a representative voice on the board, but instead is seeking to achieve effective control of the CSX board of directors and dictate company strategy,” said Edward Kelly, presiding director of the CSX board.
Rising investor interest has followed improved railroad financial performance in recent years, spurred in large measure by operational improvements and increased demand for intermodal and coal transport.
CSX separately said it will continue its aggressive stock buyback program to raise share value. The board authorized about $2.4 billion to buy back shares in 2008, which combined with nearly $600 million of authority remaining under the existing program, represents about 15 percent of the company’s market capitalization. The company has repurchased nearly $3 billion in shares since 2006.
It also said it planned to increase the quarterly dividend by 20 percent to 18 cents per share, which follows a 50 percent increase last year and represents a near tripling of the quarterly dividend since 2006.
As for its financial performance, CSX offered first quarter guidance that earnings per share are expected in the 74 cent to 77 cent range, a 42 percent to 48 percent increase compared to reported earnings per share of 52 cents in the same 2007 quarter.
CSX also expects to report full-year earnings of $3.40 to $3.60 per share, representing a 24 percent to 31 percent increase compared to reported earnings per share from continuing operations of $2.74 in 2007. The first quarter and full-year guidance includes a gain from a sale of real estate of 4 cents per share.
CSX said it expected operating income to grow 13 percent to 15 percent on a compound annual basis through 2010 compared to the prior guidance of 10 percent to 12 percent. It forecast an operating ratio (a key performance measure of operating efficiency) in the low 70s, compared to the prior target of mid-to-low 70s.
The railroad said it still plans to spend almost $5 billion on capital investments through 2010.