Ackman-Backed CEO Seeks Deputy as Pacific Rail Rises

Canadian Pacific Railway Ltd. Chief Executive Officer Hunter Harrison, who was lured from retirement as the head of Canadian National Railway Co., is poised to a hire a deputy to implement his turnaround strategy at the least efficient North American carrier.

Harrison’s previous experience with Keith Creel, Canadian National’s chief operating officer makes Creel the likeliest choice for Canadian Pacific’s No. 2 executive, said investors and analysts including Canaccord Genuity’s David Tyerman.

Such a step would echo Harrison’s own recruitment by hedge-fund manager William Ackman, who waged a proxy fight to oust Canadian Pacific’s previous CEO, Fred Green. Investors already are betting that Harrison, 68, can repeat his history as a profit booster, with a 56 percent gain in the railroad’s stock since he started outpacing Canadian National’s 11 percent.

“The Keith Creel watch is on,” Tyerman said in a telephone interview from Toronto. “He is the operations guy, and the issue at CP is operations. If you get Keith, you can solve your succession plan with a guy that everybody thinks would do the job. Everything fits together.”

The Calgary-based company expects to announce its operations chief within the next three weeks, Harrison said on an earnings call yesterday.

Ed Greenberg, a Canadian Pacific spokesman, declined to comment. Mark Hallman, a Canadian National spokesman, said Creel wouldn’t comment and that the railroad had no statement about leadership changes beyond the 51-year-old Mongeau’s assertion on a Jan. 22 conference call that “I don’t see us losing people.”

Operating Rankings

Canadian National’s ranking as the least expensive of North America’s railroads to operate, on a cost-to-revenue basis, enhances Creel’s resume just as it did his former supervisor’s.

Canadian Pacific climbed 3.1 percent yesterday to an all-time high of C$116.22 while Canadian National closed at C$95.90. Both companies fell today, with Canadian Pacific dropping 1.3 percent and Canadian National slipping 0.5 percent.

Since taking the helm June 29, Harrison has trimmed his company’s operating ratio, an industry benchmark that compares expenses to sales, to 74.8 percent.

Canadian Pacific traded at a 69 percent premium to Canadian National on a price-earnings basis yesterday, compared with a 17 percent premium on Oct. 27, 2011, the day before Ackman disclosed a stake that made his Pershing Square Capital Management LP the largest investor.

Management Shake-up

Harrison, who emphasized operational efficiency at Illinois Central Corp. and then Canadian National before handing that company’s reins to CEO Claude Mongeau, wasted little time revamping Canadian Pacific’s leadership team.

Chief Operations Officer Mike Franczak left Oct. 1 after seven months in that post. Ten days later, the railroad said Chief Financial Officer Kathryn McQuade would retire on Nov. 1. And on Oct. 16, the company appointed three senior vice-presidents to oversee operations in Canada and the U.S.

The new CEO told investors at a presentation in New York last month that he plans to shrink the company’s workforce by 23 percent and will consider selling a midwestern U.S. line gained in the 2007 acquisition of Dakota, Minnesota & Eastern Railroad.

Harrison also reaffirmed his pledge to lower Canadian Pacific’s operating ratio to about 65 percent in four years. The ratio will probably be “in the low 70s” this year, the railroad said yesterday.

In the meantime, Harrison has turned his attention to finding a deputy.

Right Candidate

“There’s a key role here that all of you are aware of, called COO, that we haven’t filled yet,” Harrison said Dec. 4.

“We can offer them what nobody else can offer them, an opportunity at a CEO job in two or three years, to get a chance to maybe learn a little bit from me and the rest of the team. At the appropriate time, whether it’s internal, external, within the industry or outside, we’ll make the right decision there, and it’ll only be additive to the whole effort.”

Finding the right candidate is important since Canadian Pacific’s operating ratio remains the worst of the biggest North American rail carriers. Creel’s employer, Canadian National, boasts a ratio of 63.6, the best of those that have reported fourth-quarter earnings so far.

“Keith’s situation has been discussed ever since there was a rumor of Hunter Harrison joining CP,” said Brandon Snow, a fund manager with CI Investments’s Cambridge Advisors unit in Toronto, which owns Canadian National stock among assets of more than C$4 billion ($4 billion). “I wouldn’t be shocked if he went to CP. He and Hunter were always very close.”

‘Only Seat’

One reason that Canadian Pacific might be attractive to the 44-year-old Creel is his current chief’s relative youth, said Tyerman.

“There aren’t that many CEO jobs in the rail industry, since there aren’t that many rails,” he said. “If Keith wants to be CEO, then that’s probably going to be the only seat that’s available in the near term.”

Creel, who holds a marketing and management degree from Jacksonville State University, began his railroad career at Burlington Northern Railway in 1992 before joining Illinois Central Corp. in 1996. He -- and Harrison -- came to Canadian National when the Montreal-based company acquired Illinois Central in 1999.

Freight Schedules

“Keith has outstanding leadership skills,” Harrison said in an April 2007 Canadian National statement that announced Creel’s promotion to the post of executive vice president of operations. “He has played a significant role in leading CN’s scheduled/precision railroading model to the forefront of the rail industry.”

Precision railroading, the approach championed by Harrison at Canadian National and Illinois Central, involves running shipments and carloads on fixed timetables to ensure reliable deliveries. Maintaining freight schedules has long been an industry challenge.

Canadian National’s operations chief received total compensation of C$2.9 million in 2011, the most recent year for which data is available. He held C$9.9 million in unexercised “in the money” options, C$6.3 million in share-based awards that hadn’t yet vested, and C$11 million in awards that hadn’t yet been paid out or distributed, according to Canadian National’s 2012 management information circular.

“From CN’s point of view, he can leave but if he does, CP is going to have to pay,” said Snow, at Cambridge Advisors. “There will be a loss of pay and a loss of stock, probably in the tens of millions of dollars. That would be their stance.”

Executive poaching “is always a risk for CN,” said Denis Durand, senior partner at Montreal-based asset manager Jarislowsky Fraser Ltd., the company’s sixth-largest shareholder. “It’s a by-product of being the most efficient railroad. Thankfully CN has a lot of depth in its executive team. They’ve had executives leave before, and I’m sure they can deal with another departure.”