Canadian Pacific Railway Ltd.’s chief executive officer may wear a target on his back as the company’s biggest shareholder, William Ackman’s Pershing Square Capital Management LP, pushes for a management switch.
Ackman said yesterday the railroad sought a meeting with his proposed replacement for CEO Fred Green -- Hunter Harrison, the retired chief at Canadian National Railway Co. Canadian Pacific Chairman John Cleghorn said the railroad never requested talks with Harrison, while not ruling out a CEO change.
“Why wouldn’t they have said in there, ‘Look, Fred Green’s our guy, he’s going to continue to run the company,’” said Brian Yarbrough, an Edward Jones & Co. analyst in St. Louis. Cleghorn’s only stated concern about Harrison in a letter to Ackman was the former CEO’s “non-compete” agreement with Canadian National, Yarbrough said.
Green’s future figured in an exchange of letters between Cleghorn and Ackman. Cleghorn wrote that Calgary-based Canadian Pacific has a “strong management team” and didn’t mention Green. Ackman said it is the “senior-most leadership of the company that must be changed, namely Fred Green.”
The 55-year-old CEO has run Canadian Pacific since May 2006. The railroad’s ratio of operating costs to sales is the highest among North American peers, and annual profit slid 18 percent from 2006 to 2010. Net income fell in each of 2011’s first three quarters as foul weather cut train speeds.
‘Pretty Bold Move’
Ackman is making a “pretty bold move to suggest another CEO” at a company with a leader in place, said Matthew McGreal, a principal at executive recruiter Crist Kolder Associates LLC in Hinsdale, Illinois. “I wouldn’t say it’s that common.”
In championing Harrison to run Canadian Pacific, the country’s second-biggest carrier, Ackman is backing the CEO who helped triple net income during seven years in charge of Canadian National. Harrison, 67, stepped down in 2009 from the country’s largest railroad.
The “significantly increased” probability of Harrison’s becoming CEO spurred Thomas Wadewitz, a JPMorgan Chase & Co. analyst in New York, to raise his rating on Canadian Pacific today to “neutral” from “underweight.”
“If Mr. Harrison is appointed CEO, it would provide a clear catalyst for operating improvement and margin expansion,” Wadewitz said in a note to clients.
Canadian Pacific’s network runs through the Canadian Rockies and the U.S. Upper Midwest. While much of the railroad’s declining efficiency and falling profit can be attributed to harsh weather, Harrison boasts a “phenomenal” record and would impress Canadian Pacific’s board, Edward Jones’s Yarbrough said in an interview.
“Nothing against Fred, but you’re probably going up against one of the best railroad operators” in the U.S. and Canada, Yarbrough said of Harrison. He rates Canadian Pacific stock as “buy.”
Harrison declined to comment yesterday. Mark Seland, a Canadian Pacific spokesman, said the railroad stood behind Cleghorn’s letter.
Pershing disclosed its initial Canadian Pacific stake on Oct. 28 and has since expanded that holding to 14.2 percent. Ackman, 45, invests in companies he deems undervalued and pushes changes he says will improve shareholder returns.
Canadian Pacific rose 1.5 percent to $69.74 in New York, the highest closing price since June 2008. The U.S. shares fell 31 percent in 2011 through Sept. 22, a day before New York-based Pershing began buying the stock, dwarfing the 3.8 percent drop for Montreal-based Canadian National.
“People start to look at the leadership of a company and wonder if the performance is a direct result of that leadership and if a change needs to be made,” McGreal, the Crist Kolder principal, said in an interview.
Ackman’s campaign for CEO change echoes his approach at J.C. Penney Co., which brought in Apple Inc.’s retail chief, Ron Johnson, last year after Pershing became the biggest investor in the Plano, Texas-based department-store chain. J.C. Penney surged 17 percent, the most since 2000, after the hiring of Johnson, which Ackman called “a credit to the company.”
Yesterday’s exchange of letters between Pershing and Canadian Pacific included assertions by both sides that talks had been “constructive,” even as Cleghorn and Ackman disagreed on the substance of some of those discussions.
Cleghorn wrote that when Pershing put forward Harrison’s name as a CEO candidate, Canadian Pacific “expressed concern” that the retiree’s non-compete agreement with Canadian National would limit his ability to “engage with CP.” Ackman said he was the one who explained to Cleghorn that Harrison couldn’t meet with the company until Jan. 1.
Ackman said he is requesting two Canadian Pacific board seats, for Harrison and a candidate he didn’t identify, and asked that directors meet with him, Harrison and that person. He said he declined a board seat himself because the terms required him to vote Pershing’s shares in favor of each of the board’s nominees and for directors’ recommendations on other matters.
The board includes two members added last month, Tony Ingram and Edmond Harris, and Ackman said he was “supportive” of their appointments. Harris worked for Canadian National with Harrison and later was Canadian Pacific’s chief operating officer.
In the middle is Green. For Canadian Pacific, Ackman’s demands represent “a pretty harsh spotlight, and certainly from management’s standpoint an unwanted harsh spotlight,” recruiter McGreal said.