Monday, October 20, 2008

Southern Hospitality at CSX Corp

Why would a major railroad, principally involved in the transportation of freight and intermodal containers, spend $50 million to renovate and manage a luxury resort-hotel? CSX Corp. (CSX-$45.57), the owner of the venerable, Mobile four-star Greenbrier Resort, located in White Sulphur Springs, West Virginia, would say it is just part of its strategic plan to diversify its portfolio holdings to create value for shareholders. A review of the company's recent third-quarter 2008 10-Q filing reveals, however, income from real estate and resort-operations comprised just $6 million, or 0.1 percent, of net income of $382 million for the quarter ended September 26. Albeit the company did not breakout its specific numbers for its real estate and resort operations, it did admit to the following:

Results from resort operations were down in 2008 because of decreased group business resulting from the uncertainty of labor negotiations, and an inability to sufficiently reduce contractual labor costs accordingly.

Since 2007, certain dissident shareholders of CSX, including The Children's Investment Fund and 3G Capital Partners, have attempted to reform the Company's corporate governance practices. For example, in April 2008, the hedge funds alleged in an
amended Proxy Filing:

...the improprieties in CSX's executive compensation practices went beyond the use of material non-public information in stock grants ["spring loaded" options]. Indeed, a former employee has recently filed suit and alleging that CSX's top executives have obtained substantial amounts in undisclosed non-cash compensation in the form of perquisites at the Greenbrier Hotel, a resort owned by CSX.

In March 2008, Paul Ratchford, former president of The Greenbrier,
filed a $50 million lawsuit against CSX, claiming that CSX President Michael Ward fired Ratchford after he tried to stop company executives from enjoying free rooms and meals, discounted merchandise and even free medical exams at the resort. In addition, Ratchford's lawsuit claims that CSX executives were benefiting from the lavish comforts available at the four-star resort while, Ratchford claims, The Greenbrier was losing roughly $15 million a year.

Are the activist hedge funds and Ratchford focused on personal gain - or do they raise legitimate issues as to corporate governance practices at CSX?

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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