Activist Ancora may turn to a reliable tactic to enhance value at Norfolk Southern

Activist Ancora may turn to a reliable tactic to enhance value at Norfolk Southern


A Norfolk Southern rail terminal in Austell, Georgia, US, on Tuesday, July 25, 2023.

Elijah Nouvelage | Bloomberg | Getty Images

Company: Norfolk Southern (NSC)

Business: Norfolk Southern is a railway firm. It transports a number of uncooked supplies, intermediate merchandise and completed items within the United States.

Stock Market Value: $57.56B ($254.83 per share)

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Norfolk Southern’s efficiency over the previous yr

Activist: Ancora Advisors

Percentage Ownership:  ~1.75%

Average Cost: n/a

Activist Commentary: Ancora is primarily a household wealth funding advisory agency and fund supervisor with $9 billion in property below administration, with an alternate asset administration division that manages roughly $1.3 billion. It was based in 2003 and employed James Chadwick in 2014 to pursue activist efforts in area of interest areas like banks, thrifts and closed-end funds. Ancora’s web site lists “small cap activist” as a part of its merchandise and techniques, and its technique has advanced lately. From 2010 to 2020, nearly all of Ancora’s activism was 13D filings on micro-cap corporations. In the previous few years, the agency has taken a higher variety of sub-5% stakes in bigger corporations. The alternate options staff has a observe document of utilizing non-public and when obligatory, public engagement with portfolio corporations to catalyze company governance enhancements and long-term value creation.

What’s occurring

The Wall Street Journal reported on Feb. 1 that an investor group led by Ancora has taken a place in Norfolk Southern and plans to run a proxy struggle to exchange a majority of the corporate’s board and to exchange the CEO, Alan Shaw.

Behind the scenes

Ancora is a $9 billion wealth advisory agency that has been utilizing activism extra usually and has developed into an activist to be revered and feared. With an approximate $1 billion place in NSC, the agency probably has a accomplice who has shared within the funding and is counting on Ancora to lead the activist effort.

Norfolk Southern (NSC) is a Class I railroad working freight trains within the United States. Railroads have been frequent targets of activist buyers for a few years with TCI at CSX, Pershing Square at Canadian Pacific, Mantle Ridge at CSX, TCI at Canadian National and now Ancora at Norfolk Southern. One of the explanation why railroads are so incessantly focused by activists is as a result of they’re comparatively easy companies. When they underperform their friends, it’s simple to perceive why and usually easy to repair.

Norfolk Southern has materially underperformed the markets and its friends over the previous one, three and 5 years. When you see that in a railroad firm, there’s one key metric to look at, which drives railroad profitability and shareholder return: It’s the working ratio. The working ratio is the corporate’s working bills as a proportion of income. When Pershing Square and the late railroad veteran Hunter Harrison went to Canadian Pacific, CP had an working ratio of 81% and Harrison was in a position to get it down to 64.7%. When Mantle Ridge and Hunter Harrison got here into CSX, the corporate had an working ratio of 70%, which Harrison was in a position to get down to 58.4%. NSC’s working ratio is sort of 69% and the best administration staff with the best technique ought to simply have the ability to get the working ratio down shut to 60%.

The technique that Hunter Harrison and his “cubs” have so efficiently been in a position to implement is precision scheduled railroading, or PSR. This technique prioritizes constant, reliable, predictable service by scheduling and operating fewer trains. It reduces switching prices, which additionally leads to fewer security dangers, and the transfer has labored just about each time it has been carried out. But, for some motive, NSC makes use of a resilience mannequin that doesn’t prioritize price reductions; they’re the one publicly traded Class I rail firm that doesn’t make the most of the PSR technique. Moreover, a resilience mannequin permits extra short-haul and decrease margin intermodal transportation: This makes use of two modes of transportation, like rail and truck or rail and water. Under a PSR technique, the corporate would additionally have the ability to enhance its transportation combine to extra greater margin routes and merchandise classes.

There is not any want to reinvent the wheel right here; the roadmap has already been drawn at Canadian Pacific and CSX. Ancora is probably going to comply with the identical technique right here. First, get a majority – or shut to a majority – of the board. Second, usher in a CEO with expertise efficiently implementing a PSR technique. Ancora is nominating a majority slate of administrators that embody former Ohio governor John Kasich and former Kansas City Southern govt Sameh Fahmy. The agency will probably embody at least one Ancora consultant on the slate who we might count on to be Jim Chadwick, signaling Ancora’s dedication to be a long-term shareholder right here. Just as a result of the agency is nominating a majority slate doesn’t imply that there isn’t a room for settlement under a majority. Ancora doesn’t want a majority of the board to achieve success right here. At Canadian Pacific, Pershing Square obtained lower than a majority. At CSX, Mantle Ridge obtained 5 of 13 administrators. But the important thing factor in each of these conditions is that the CEO was changed. That is one thing that we consider may have to occur right here for Ancora to achieve success.

We would count on to see the corporate come to the desk for settlement discussions, however in need of a settlement, now we have little doubt that Ancora will take this to a proxy struggle and win. Inside the activist world, and amongst buyers who had been shareholders of Canadian Pacific and CSX, that is as positive of an activist technique as there’s. Three of NSC’s high shareholders are additionally former buyers of CSX when Mantle Ridge created a lot value for them with this technique. Further, there are a number of different hedge funds that personal NSC, and we’d count on them to assist Ancora’s director slate.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. 



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