Hedge fund Soroban Capital Partners is urging Union Pacific Corp. UNP 0.36% to replace chief executive Lance Fritz and argues the railroad has underperformed under his oversight, according to a letter the fund sent to the rail operator’s board on Sunday.
Soroban is a longtime investor in Union Pacific, one of the company’s largest shareholders with a stake of over 1% valued at about $1.6 billion, the letter said.
Soroban argues that Union Pacific, the largest rail freight operator in the United States with a market cap of nearly $120 billion, was the worst performer during Mr. Fritz’s eight-year tenure, despite strength on key operating metrics such as safety, volume growth and total shareholder return railway network. According to FactSet, the Omaha, Neb. railroad’s returns, including dividends, were the worst percentage-wise among so-called Tier 1 railcars during the period.
The $10 billion hedge fund is pushing for railroad veteran Jim Vena, Union Pacific’s chief operating officer from 2019-2020, to take the top job instead. Soroban believes the company’s stock price could double in two years under Mr. Vena, who ran to be CEO of Canadian National Railway Co. in 2021, given his operational experience in the industry, the letter said. Soroban made the letter public after the Wall Street Journal reported it.
“We want the UNP to thrive,” wrote Soroban founder Eric Mandelblatt. “Unlike typical shareholder engagements, which come with numerous demands, Soroban has just one question: Install new guidance that can keep trains running safely and on time.”
“Union Pacific is in regular discussions with our shareholders, including Soroban,” a railroad spokeswoman said. “Executive succession planning is a top priority for the Board and an active process is underway,” she added, echoing previous statements by the company.
Lance Fritz has been the Chief Executive Officer of the Omaha, Neb., Railroad for eight years.
Photo: Victor J Blue/Bloomberg News
When asked by The Wall Street Journal, Mr. Vena said he was open to speaking with Union Pacific about taking on the CEO role and expressed his admiration for the company. “Union Pacific has an opportunity to be the best in the business,” he said.
Soroban’s letter said the fund had privately expressed its dissatisfaction with the company’s performance for years, including most recently in August. Soroban has told the board that quick action must be taken to allow Union Pacific to capitalize on trends that the investor says are benefiting railroads, including renewed investment in domestic manufacturing and efforts to reduce carbon emissions.
Soroban is “fully committed to ensuring that these changes are implemented expeditiously,” the letter said. According to people familiar with the matter, the fund currently has no plans for a proxy fight.
In January, Union Pacific reported fourth-quarter earnings and revenue that fell short of Wall Street’s expectations as labor shortages, inflation and severe winter weather weighed on growth. Union Pacific and other U.S. railroads have issued cautious outlooks for 2023 amid more subdued demand for finished goods, among other things, as well as higher costs.
Union Pacific has also scrutinized the Surface Transportation Board, the regulator of US rail freight. The STB held a hearing in December about Union Pacific’s increasing use of embargoes — restrictions rail operators impose on the amount of freight they can move — which the regulator said are sparking complaints from shippers and exacerbating supply chain problems have.
Soroban’s public push for change is unusual. The hedge fund takes concentrated holdings and in recent years has focused on big tech companies and more recently commodity investments. But it has rarely taken an activist position since its inception in 2010.
Mr. Mandelblatt, 47, started on Wall Street as an energy analyst for Goldman Sachs Group Inc. in the 1990s and has invested in railroads since 2005. Soroban has invested in Union Pacific since 2016 and is the majority shareholder of CSX Corp. It also has in Norfolk Southern Corp. invested.
Soroban’s move comes at a time of rising activism as depressed stock prices encourage investors. Salesforce Inc. and Walt Disney Co. have both attracted several activists, although Nelson Peltz’s Trian Fund Management LP canceled its voting rights contest at the entertainment company earlier this month after Disney unveiled a reorganization and cost-cutting plan. Dan Loeb’s Third Point LLC also plans to hold a proxy fight against Bath & Body Works Inc.
Write to Juliet Chung at [email protected] and Lauren Thomas at [email protected]
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