Icahn Plans to Buy 15% Stake in Ailing Rail Giant CSX

Financier Carl Icahn, fresh from ending a years-long battle for control of Nabisco Group Holdings Corp. that will earn him more than $800 million, promptly turned his attention to CSX Corp. with plans to buy as much as 15% of the giant but struggling eastern railroad.

But CSX, which disclosed Icahn’s intentions late Tuesday, immediately indicated that it plans a tough defense against any effort by Icahn to wrest control of the Richmond, Va.-based concern.

The company said its chief executive, John Snow, met with Icahn and that the New York investor said “he had no specific plans with respect to the company,” but rather that its stock was “undervalued by the market and was therefore a good investment.”

Nonetheless, CSX quickly strengthened its “poison pill” anti-takeover bylaws to kick in if any investor acquires 10% of the company, compared with its earlier 20% threshold. The move was a clear signal to Icahn that, if he buys 15% of CSX’s stock, he runs the risk of triggering the plan, which would massively dilute his stake in the company by flooding the market with additional shares.

CSX, though, is a prime candidate for someone like Icahn: a company down on its luck but with the potential to rebound sharply. And Icahn is not unfamiliar with the industry; one of his other holdings is involved in leasing rail cars.

“CSX is a beaten-down stock where the [company’s] operating statistics are starting to improve, even if the financial numbers are lagging,” said analyst Michael Lloyd of the investment firm Deutsche Banc Alex. Brown.

The railroad’s earnings have tumbled this year in the face of service breakdowns, higher fuel costs and operating snags stemming from its purchase--along with Norfolk Southern Corp.--of Conrail Inc. last year.

CSX, whose rail system spans 22,700 miles in 23 states, also has seen turmoil in its executive suite and the company’s stock has plunged 50% in the last 12 months to a nine-year low. It closed Tuesday at $20.56, up 69 cents on the New York Stock Exchange before CSX announced Icahn’s plans.

CSX was formed by the 1980 merger of two railroads, Seaboard Coast Line and Chessie System. CSX later acquired the ocean-shipping concern Sea-Land Service, and, through most of the 1990s, the company and its stock flourished.

But costs related to the Conrail deal began to cut into profits, and the problems worsened after the deal was completed and CSX began digesting its share of Conrail.

In this year’s first quarter, CSX’s operating profit skidded 61% from a year earlier in good part because of freight backups and congested terminals along its system. CSX, whose revenue totaled $10.8 billion last year, also said many of the problems were on old CSX tracks, rather than on Conrail lines.

In April, the company’s top rail executive, Ronald Conway, resigned as CSX acknowledged that it wasn’t moving fast enough to fix its problems. Still, CSX said it enjoyed strong shipments of autos, coal, chemicals and other merchandise, and that it expected demand for its services to stay robust for the rest of the year.

Indeed, some analysts said that if CSX can quickly solve its freight disruptions and continue to lower costs without losing significant market share to rivals, the company could recover nicely because of strong shipping demand.

Icahn, who could not be immediately reached for comment, clinched the bulk of his Nabisco Group profit this week when Philip Morris Cos. agreed to buy the company’s sole asset, the snack maker Nabisco Holdings Corp., for nearly $15 billion in cash.

But while Nabisco has dominated Icahn’s headlines, the veteran corporate raider owns stakes in a variety of firms in other fields, including rail-car leasing, hotel-casinos, mining and auto parts.

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Bloomberg News was used in compiling this report.

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Tough Track

Shares of railroad giant CSX Corp. have plunged to a nine-year low amid slumping earnings. Quarterly closes and latest on the New York

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