INVESTMENT firm Soroban Capital Partners has written to the board of Union Pacific (UP) setting out its case to appoint Mr Jim Vena as the company’s next CEO in order to improve operational performance and enhance shareholder value.
Soroban says that under the leadership of current chairman, president and CEO Mr Lance Fritz, UP “has repeatedly and significantly failed to reach its potential,” and now ranks “the worst in safety, volume growth, revenue growth, cost management, Ebit growth and total shareholder return” of the seven US Class 1 freight railways.
The investment firm currently owns a $US 1.6bn stake in UP, “making our firm a top 10 economic owner of the company,” according to Soroban managing partner and chief information officer, Mr Eric Mandelblatt.
In his letter to UP lead independent director, Mr Michael McCarthy, Mandelblatt reiterates his “long-standing belief that UP is the crown-jewel asset of the North American transportation sector.”
“UP’s rail network has many distinct advantages, including long length of haul, unparalleled reach across a high-growth geographic service territory, and a merchandise-heavy product mix,” he says.
“We have been consistent in privately expressing to you and other board members our displeasure with years of persistent operating underperformance at UP and our long-held view that current management is not capable of driving strong operating performance.”
“Regrettably, acute operating issues at UP have continued,” Mandelblatt says, and Soroban sees “a heightened risk of permanent damage” to the company if they are left unaddressed.
“While it is highly atypical for Soroban to publicly disclose our communication with a board of directors, given the board’s prolonged inaction despite years of underperformance, we feel it is critical for the company’s future that we highlight the need for Fritz to be replaced with best-in-class leadership.”
“Key constituents have understandably lost confidence in Fritz’s ability to lead the company,” Mandelblatt says, pointing out that UP’s total shareholder return has been the worst in the industry. “The company is not delivering on its commitment to customers, and the Surface Transportation Board has singled out UP as providing the worst service among the Class I railroads.”
“Well-run operations are the enabling foundation for all other value creation levers of a railroad,” Mandelblatt continues. “Therefore, it is paramount that the next leader of the company has a proven track record of railroad operating excellence.”
Mandelblatt notes that when the UP board appointed Vena as chief operating officer in in 2019, he rapidly transformed UP “from an underperforming to a top performing railroad only to inexplicably be allowed to walk away after less than two years. Operations almost immediately reverted to worst-in-class levels.”
“We believe he would be keen to return to UP in a new leadership role. Mr Vena benefits from his deep knowledge of UP’s culture, employees, customers, and network. In addition, no internal candidates are remotely as qualified as Mr Vena, and he is the leading external candidate available.”
Soroban believes that with “best in class leadership,” the UP stock price has the potential to double over the next two years, increasing market capitalisation by $US 67bn. This is under a conservative scenario where the company only recaptures half the volume underperformance in comparison with its peers that UP has experienced under Fritz’s tenure as CEO.
“We believe these estimates leave room for meaningful, long-term upside,” Mandelblatt says. “And of equal importance, a change in leadership will allow UP to heal its relationships with employees, customers, and regulators; re-establish UP’s importance to the US economy; and help the US accelerate the transition to a lower-emissions environment.”
Mandelblatt adds that it is imperative for the UP board to act now to capitalise on the current “golden age” for the Class 1 railways, as its main competitor the trucking industry faces “structural headwinds” and the United States undergoes “a new industrial investment super cycle.”
“Railroads are key decarbonisation enablers, with the ability to take meaningful market share from trucks given their 75% lower carbon emissions per ton-mile,” he says.
“Unlike typical shareholder engagements which come with numerous demands, Soroban has only one ask: install new leadership who can get the trains to operate safely and on time,” the letter concludes. “UP deserves better leadership. It is time for the board to act.”
UP says that since Fritz took up the role of CEO in February 2015, he has overseen “a period of growth, innovation and value creation, and transformed the company’s operating plan to improve asset efficiency. Since 2017, UP has achieved a 52% increase in net income, a 27% increase in operating income and a 3.7 point increase in return on invested capital.”
Following discussions with Fritz over the appointment of his successor, in March 2022 the UP board formed a task force that it now seeking a CEO “with a strong track record of success and expertise across safety, operational excellence, enhancing and driving customer service, innovation, employee culture and sustainability.”
Focusing the process on “highly-qualified candidates both within the industry and adjacent industries” to identify a CEO capable of leading UP over the long term, the board expects to appoint a successor who will take up the post later this year.
McCarthy says that Fritz “has capably led our company during a time of significant challenge and change, positioning UP to deliver long-term sustainable value for shareholders and customers.
“We are immensely grateful to have his continuing leadership and support and know he will ensure a smooth transition.”
The January issue of IRJ looked in depth at US Class 1 growth prospects for 2023. Digital subscribers can read the article here.
