Paul Hilals new Mantle Ridge activist fund, a
special-purpose vehicle launched last summer after he left Bill
Ackmans Pershing Square Capital Management, has almost
hit the $2 billion mark, after raising some $1.2 billion last
fall and winter.
Since then Mantle Ridge has made about $700 million in
performance gains from its single investment in CSX Corp., the
U.S. railroad, after convincing the company to hire Hunter
Harrison as CEO earlier this year, says Kenneth Squire, the
head of 13D Monitor, which tracks activist investors.
Theres just one catch: Hilal has to hold onto those gains
for years to get paid, and right now that is looking like a
A spokesman for Mantle Ridge declined to comment.
Mantle Ridge was designed to invest solely in CSX, hoping to
repeat Pershing Squares coup at Canadian
Pacific Railway, where the hedge fund won a proxy battle and
installed Harrison to great success. Both Ackman and Hilal, who
have been close friends since their college days at Harvard,
served on the board of Canadian Pacific. As Harrison revamped
the railroad, following a similar effort at Canadian National
Railway, the stock soared 150 percent, and Pershing Square made
$2.5 billion over five years.
[II Deep Dive: What Makes a Firm a Target for
While Harrison was CEO at Canadian Pacific, the railroad
tried to merge with CSX to expand into the U.S. but was
spurned. It then abandoned a bid to merge with another U.S.
railroad, Norfolk Southern Corp., after which Hilal resigned
from Pershing Square. Within months he was readying Mantle
Ridge, with plans to take on CSX via a proxy battle, if
necessary, to install Harrison, who agreed to leave Canadian
Pacific to do so.
Mantle Ridge began amassing a 4.9 percent stake in CSX late
last year, and early this year Hilal began pressing the
railroad to hire Harrison. To avoid a proxy battle, the company
agreed in March, signing Harrison to a four-year contract. But
to convince Harrison to leave Canadian Pacific, Mantle Ridge
had to buy out Harrisons remaining contract, which
amounted to $84 million, so it asked CSX shareholders to pay
Mantle Ridge back to avoid a departure by Harrison.
Although it was a controversial decision, shareholders
agreed to pay the $84 million, leading CSX stock to peak around
$55 that month, up from $35.89 on January 3. It has since slid
to $48.74 still up 36 percent for the year.
Monetizing Hilals gains at Mantle Ridge could be
harder than the success at Pershing Square, however. For one
thing, the fund is set up as a special-purpose vehicle with
private-equity-like terms. Mantle Ridges investors all
have different terms, but typically SPVs charge between 10 and
30 percent above a hurdle. Mantle Ridges investors have a
fiveyear lockup, and Hilal wont get paid until that
time, at which time his fund will sell its CSX stake.
Meanwhile, Harrisons efforts to shake up the railroad
in the same way he did elsewhere have not gone smoothly.
According to a Wall Street Journal report this week,
Congestion, delays, and erratic service are hitting
Even Harrison has admitted that his attempt to streamline
CSX hasnt been easy, and some employees are resisting his
efforts to, among other things, get rid of naps that workers at
U.S. railroads are allowed to take during downtimes. The
railroads regulator, the U.S. Surface Transportation
Board which was asked by the Justice Department to
oppose the merger of Canadian Pacific with Norfolk Southern
told Harrison it is concerned about widespread
degradation of the service.
A spokesman said in a statement to Institutional Investor
that CSX is transitioning to a new operating model,
which it acknowledges has created unintended
effects for its customers. CSX has acknowledged
these issues, and we are committed to working through and
resolving them as quickly as possible, the spokesman
Sources also say its unclear whether the 72-year-old
Harrison, who is often working remotely from his home in
Florida, can perform the same magic he pulled off at Canadian
Pacific and elsewhere. A health scare unnerved investors in
Canadian Pacific two years ago, and Harrison was seen tethered
to an oxygen machine at the annual CSX shareholder meeting in
June. At the meeting, Harrison assured investors that his
doctor had cleared him to work and that the board of directors
was fully apprised of his condition, but he did not
disclose what it was.
Since becoming CEO, Mr. Harrison has been and
continues to be actively and deeply involved on a daily basis
overseeing all aspects of the management and operation of CSX,
and providing leadership and direction across the
organization, the CSX spokesman said in the