Institutional Investor's Alpha Magazine - September 2008 - (Page 36)

Christopher Hohn the same bidding privilege to Royal Bank of Scotland, Fortis and Banco Santander Central Hispano. The RBSled consortium won the bidding war, paying €70 billion, or €36.95 per share, for the Dutch bank — almost exactly in line with the breakup estimate of €38 that TCI’s team had forecast. Hohn, easily irritated by shareholders who bemoan any change in the status quo, simply points to the openness of the voting process when challenged. “When people requests for face-to-face meetings with senior management to discuss various options, including the possibility of a leveraged buyout, communications between the hedge fund ﬁ rm and the rail company broke down. As TCI’s demands escalated, CSX’s resistance rose: When Amin ﬁnally met with the railroad’s CFO, Oscar Munoz, in March 2007, Munoz told him he would have to agree to a listen-only meeting and not ask any questions. Frustrated, Amin and Hohn began organizing a proxy ﬁght in mid-2007. The struggle quickly moved from behind closed doors to the open forum of the ﬁnancial markets when TCI wrote a letter to CSX’s board in October 2007, accusing management of failing to “fully understand the economics of the business” and being “undisciplined about spending.” Instead of bowing to the pressure, however, CSX fought back with hardball tactics of its own — including lobbying Congress to interrogate TCI. On March 5, Amin was summoned to Washington to testify before the House Subcommittee on Railroads, Pipelines and Hazardous Materials about the hedge fund ﬁ rm’s motives. Representative Corrine Brown, a Florida Democrat who chairs the subcommittee — and whose home district includes Jacksonville, where CSX is based — took the lead, introducing TCI in the Congressional Record as the ﬁrm “that has been referred to as locusts” in Germany. She then added that it was important to protect “critical infrastructure” from the “potential harm” of foreign ownership. Two weeks after the hearing, CSX ﬁ led a lawsuit in New York alleging that TCI and its New York–based investment partner, 3G Capital Partners, had violated securities regulations by amassing a stake in excess of 5 percent by buying stock and using total-return equity swaps, which do not confer voting rights, to gain inﬂuence over CSX without disclosing their holdings in a timely manner. The lawsuit also charged that TCI and 3G had pursued a so-called common investment strategy in CSX — which also requires disclosure — before they announced on December 19, 2007, that they had formed an investment group. The judge, Lewis Kaplan of the United States District Court for the Southern District of New York, took a dim view of TCI and 3G’s e-mail correspondence and found fault with the two hedge fund ﬁrms on both points. Despite his opinion that the funds should have operated more openly in building their positions, Judge Kaplan denied CSX’s most consequential request: to block TCI and 3G’s voting rights at the shareholder meeting in June. All he did was issue an injunction stopping the ﬁrms from violating securities laws in the future. For Hohn, who took the stand to testify this summer in a crowded Manhattan courtroom, the experience was a stinging introduction to the political risks and realities of investing. But instead of retreating into silence, he has chosen to abandon his penchant for secrecy: This spring TCI created a Web site, “Toward a Stronger CSX,” where Hohn and his team laid out their investment thesis and posted all “Buffett has always said he looks for good management teams. We’ve often done just the opposite.” — CHRISTOPHER HOHN say that what we do is bad and wrong, we ask them, ‘Why is shareholder democracy bad and wrong?’” he says. “Shareholders are owners of companies, and they always have a choice. They should exercise their rights.” H ohn’s attraction to CSX was inevitable. In searching out bargains hiding in plain view, he and his team at TCI often look for midcap to large-cap monopolistic companies that are undervalued on an absolute basis, have signiﬁcant free cash ﬂow and operate in industry sectors where there is a high barrier to entry — “a moat,” as he describes it. In 2006, Hohn and Amin, who oversees TCI’s investment strategy in the Americas, began researching railroads in the U.S. — just as Berkshire Hathaway CEO Warren Buffett began exploring the sector. They believed that CSX and similar rail companies, which had been struggling for years, were poised to see a big rise in freight volumes and revenue, beneﬁting from the combination of global economic growth and higher energy costs (shipping by rail is far cheaper than moving goods long distances by truck). In the course of the team’s due diligence, TCI contacted the management groups of several companies. Amin says that CSX chairman and CEO Ward, unlike his competitors, would not publicly disclose any of his company’s productivity targets before TCI’s involvement — a charge Ward vehemently denies. “As our earning power has increased over the past ﬁve years, we have said publicly that we are going to do share buybacks, increase our dividend and invest for the future,” Ward told Alpha this May, before CSX’s annual meeting. “We were doing that before TCI arrived, and we are going to continue to do that — TCI has not made it happen, although they like to take credit for it.” In the winter of 2006, as TCI’s Amin made repeated 36 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - September 2008

Institutional Investor's Alpha Magazine - September 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Culling the Herd The Good Guys: Ending the Cycle Interview: Press Credentials Cover Story: Rethinking Chris Hohn Strategies: At the Edge of the Earth Profile: Alpha Femals Strategies: Tails, You Lose Research Center: The Top Equity Trading Firms Alpha Bytes: The Light Is On Unhedged: Commentary: Not-So-Dire Diagnosis

Institutional Investor's Alpha Magazine - September 2008

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