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CSX Says TCI Fund May Buy $500 Million of Its Stock (Update5)

Date: Wednesday, April 18, 2007
Author: Otis Bilodeau and Angela Greiling Keane, Bloomberg

April 18 (Bloomberg) -- CSX Corp., the third-largest U.S. railroad, said U.K. hedge fund TCI Fund Management LLP holds a ``significant'' stake in the company and filed to buy more than $500 million of its stock. The shares rose 2.8 percent today to a record.

TCI is a so-called activist fund that earlier this year pushed for the breakup of ABN Amro Holding NV. The U.K.'s Barclays Plc is in talks to buy ABN Amro, the biggest Dutch bank, for more than $90 billion.

TCI founder Christopher Hohn is the second major investor to disclose a recent bet on U.S. railroads. Warren Buffett's Berkshire Hathaway Inc. earlier this month said it increased its stake in Burlington Northern Santa Fe Corp., the nation's second- biggest railroad, to 10.9 percent. Buffett also told CNBC in an interview that he bought shares of two other rail companies.

``Any activism is going to have to be more of a friendly nature,'' said Jason Seidl, a Credit Suisse analyst-based in New York with an ``outperform'' rating on CSX. ``I think it may be hard to turn some long-term investors against the company.''

CSX shares gained $1.23 to $44.56 at 4:18 p.m. in New York Stock Exchange composite trading, after reaching $46.23. The volume of 25.8 million shares was four times the daily average in the past six months. The stock has risen 29 percent this year.

TCI, which gives a portion of its profits to a charity known as the Children's Investment Fund Foundation, notified CSX of the purchase plan on March 15, the Jacksonville, Florida-based railroad said in a filing today with the U.S. Securities and Exchange Commission.

The London-based hedge fund also told CSX that it owned some of the company's common shares as well as derivative contracts tied to the stock. CSX shares surged 6.2 percent on March 16.

`Sign of Interest'

CSX Chief Executive Officer Michael Ward said he doesn't consider TCI's investment a takeover attempt.

``I think they see that there's value in the industry,'' Ward said in an interview today. ``I really do think it's another sign of interest in our industry.''

Ward said he didn't know if Buffett's railroad investments include CSX shares.

Hohn said in an April 10 interview that TCI didn't have a ``material'' amount of ``physical shares'' in any U.S. railroad.

``At the time we spoke it was accurate,'' Hohn said today in an e-mail. ``Things changed since we spoke.'' He declined to comment further.

Hart-Scott-Rodino Filing

A $500 million investment would make TCI the seventh-largest CSX shareholder, according to Bloomberg data. TCI filed to acquire CSX shares under the Hart-Scott-Rodino Act, which requires buyers in U.S. mergers and acquisitions to notify the Federal Trade Commission and Justice Department. Buyers must wait for approval before proceeding.

Justice Department spokeswoman Gina Talamona said she couldn't comment on TCI's investment in CSX.

TCI waged a previous activist campaign alongside another fund with a large stake in CSX. Atticus Capital LP, a hedge-fund group in New York, had accumulated 10.2 million CSX shares, a 2.3 percent stake, as of Dec. 31, according to U.S. filings.

TCI and Atticus successfully pushed in 2005 for the ouster of former Deutsche Boerse AG Chairman Rolf Breuer and Chief Executive Officer Werner Seifert, after buying enough stock to rank among the German exchange's biggest shareholders.

Seifert published a book last year about the episode titled ``The Invasion of the Locusts.'' The hedge funds' approach was ``extremely fast,'' he wrote. ``And totally incognito.''

Railroad Investments

Atticus, which manages $13.5 billion, also was among the biggest shareholders at year-end in the three other largest U.S. railroads, Union Pacific Corp., Burlington Northern, and Norfolk Southern Corp., the filings show.

``We have been shareholders of CSX and other rails since last summer, and are strong believers in the long-term prospects for the industry,'' Atticus CEO Timothy Barakett said in an e- mailed statement. ``We are not surprised that other investors like Warren Buffett and TCI also recognize their potential.''

Hohn said in an April 10 e-mail that TCI has ``no cooperation with Atticus on any investments.''

The major U.S. railroads attracted investor interest as profit rose last year. CSX's 14 percent increase in net income was the smallest among the major railroads, which were able to raise rates because of strong demand for hauling freight such as consumer goods carried by a train-truck combination and coal.

``We do not think CSX is materially better than the group on pricing,'' Rick Paterson, a UBS analyst based in New York who has a ``neutral'' rating on the company's shares, said in a report to investors today.

Buyout `Unlikely'

Paterson said the rise in CSX shares is the result of speculation about a buyout, which he called ``unlikely but admittedly possible.'' Paterson recommended that ``investors look elsewhere until cooler heads prevail.''

At yesterday's closing price of $44.50, a $500 million investment would give TCI 11.2 million shares. TCW Group Inc., a Los Angeles-based hedge fund, is the largest CSX shareholder with 23 million shares, or 5.3 percent, according to Bloomberg data.

Last week, Charles ``Chip'' Nottingham, chairman of the U.S. Surface Transportation Board, said the rail regulator would monitor investments from hedge funds or buyout firms.

``We would ask tough and appropriate questions if there was a transaction that required that,'' he said at an April 11 hearing in Washington on railroad capacity.

``We have not seen the details of the transaction, but will be keeping an eye on it specifically as it relates to our duty to inquire into and report on the business of carriers,'' Dennis Watson, a spokesman for the board, said in an interview today.

Union Pacific, the largest U.S. railroad, isn't aware of any TCI ownership of its shares, spokeswoman Kathryn Blackwell said. The Omaha, Nebraska-based company hasn't received any notification like that sent to CSX, she said.

``I can't provide any additional information,'' said Susan Terpay, a spokeswoman for Norfolk, Virginia-based Norfolk Southern, the fourth-biggest U.S. railroad.

Burlington Northern, based in Fort Worth, Texas, didn't respond to a call seeking comment.

To contact the reporters on this story: Otis Bilodeau in Washington at obilodeau@bloomberg.net Angela Greiling Keane in Washington at