CN Rail Targets Cost Cuts, Buybacks to Fend Off Hohn’s TCI

(Bloomberg) -- Canadian National Railway Co. said it plans to cut spending, streamline management and buy back C$5 billion (about $4 billion) of stock next year as its tries to ward off a shareholder revolt started by TCI Fund Management Ltd. 

The measures will allow the railway to increase operating earnings and profit per share by 20% next year, Canadian National said in a statement Friday. It’s looking to improve its operating ratio, an industry measure of efficiency in which a lower number is better, to 57% next year. It was 61.6% in the second quarter.

The railroad will lead an industry shift to become more customer-oriented just as it pioneered an efficiency strategy that most peers have since adopted, Chief Executive Officer Jean-Jacques Ruest said on a conference call with analysts. 

The Montreal-based railroad faces a proxy fight from Chris Hohn’s TCI, which owns more than 5% of the company and is unhappy about its performance and its decision to pursue a $30 billion takeover of Kansas City Southern. The deal collapsed after U.S. regulators rejected a key provision that would have allowed Kansas City Southern shareholders to get paid before the merger goes through full regulatory review.

The effort to buy the U.S. railroad helped Canadian National identify opportunities to boost profit, Ruest said Friday.

“We fully appreciate that our bid for KCS may not have been in CP’s interest, but it has absolutely served CN’s interest despite the disappointing outcome,” Ruest said. The company will balance its “customer-service culture” with improving operating income and not just increasing revenue, he said. 

Canadian National’s nonrail businesses, including a freight-forwarding service and a fleet of ships on the Great Lakes, weigh on the railroad’s operating profit by two percentage points, he said. The businesses, which are designed to feed volume to the railroad, are under review and could be sold partially or entirely, Ruest said. 

The railroad plans to increase operating profit by C$700 million, including C$550 million from cost cuts and a C$150 million gain from price increases. Of the cuts, about C$250 million will come from reducing management and union workers.

TCI filed documents Thursday to call a shareholder meeting. It is trying to oust four members of the board and Ruest, replacing him with former Canadian National executive Jim Vena. TCI noted that the railroad’s operating ratio had worsened to 61.9% last year from 55.9% in 2016, the same year Vena left the company as chief operating officer. 

The fund management firm also highlighted that Canadian National is the only large North American railroad that posted a decline in operating income from 2016 through 2020, while rival Canadian Pacific led the pack with an 8.3% gain.

“TCI is not impressed with Canadian National’s sudden ‘strategic plan,” the investment firm said by email, asking why CN hadn’t implemented it before. “The current management lacks the credibility to execute the plan.”

Ruest defended past “elevated” investment to increase capacity and add technology, citing Canadian regulators’ concern over service. The network now has a good foundation to grow and to increase profit. Spending will decline to 17% of revenue from more than 20%, he said.

Canadian National rose 2.7% to C$150.81 at 3:18 p.m. in Toronto. The stock had climbed 4.9% this year through Thursday while the S&P/TSX Composite Index advanced 18%.

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