Ackman Cuts Canadian Pacific Stake After Stock TriplesFrederic Tomesco
William Ackman, the hedge-fund manager who staged a boardroom coup at Canadian Pacific Railway Ltd., plans to sell part of a stake in the carrier after the stock tripled since his 2011 investment.
Pershing Square Capital Management LP, Ackman’s New York-based firm, will cut its stake by about 29 percent by selling as many as 7 million shares from June 10 through the next six to 12 months, according to a statement yesterday. Ackman will stay on the board, Pershing Square said.
Ackman, 47, is reaping the benefits of a turnaround he set in motion by hiring a new chief executive officer to improve operations at North America’s least-efficient major railroad. His success at Calgary-based Canadian Pacific contrasts with the struggle to end losses at retailer J.C. Penney Co., where Pershing Square is also the biggest shareholder.
“Canadian Pacific was a textbook case of activism working,” Kenneth Squire, manager of the 13D Activist Fund, said by phone from New York. “Ackman was right and they executed correctly. The returns were so good, the position became such a large part of his portfolio. It’s portfolio management.”
Pershing Square’s stake of 24.2 million shares has grown to about 26 percent of the combined assets of the hedge fund’s holdings with the run-up in the stock price, Ackman said in the statement. That “increased concentration” spurred the decision to sell some Canadian Pacific stock, he said.
Canadian Pacific dropped 2.8 percent to C$131.76 at the close of today’s trading in Toronto.
At that price, Pershing Square’s stake was valued at C$3.18 billion ($3.1 billion). The shares closed at C$48.59 on Sept. 23, 2011, the day the hedge fund began buying, according to a 2011 regulatory filing.
Pershing Square’s “likely exit is indicative that current share prices offer limited upside,” Walter Spracklin, an analyst at RBC Capital Markets in Toronto, said today in a note as he cut his rating on Canadian Pacific to underperform from sector perform.
Canadian Pacific “has made significant and important strides in improving its operations, and we believe there is still more to come,” Spracklin said. “However, a share price that builds in realistic expectations for this improvement in our view would be below C$110.”
This is the first time that Pershing Square has announced plans to cut its stake in Canadian Pacific, data compiled by Bloomberg show. The hedge fund said it expects to stay the largest stockholder, and partner Paul Hilal will also remain on the board with Ackman.
Jennifer Burner, a spokeswoman for Pershing Square at Global Strategy Group, had no comment on the sale plan. Mark Seland, a spokesman for the railroad, said Canadian Pacific doesn’t discuss “shareholder activity within our stock.”
“Pershing’s typical holding period for an active investment is four years,” Benoit Poirier, an analyst at Desjardins Capital Markets in Montreal, said today in a note to clients. “In the case of CP, it is surrendering a large portion of its holdings well in advance of this timeframe.”
Pershing Square has become known for investing in companies it deems undervalued and pushing for changes that Ackman says will improve shareholder returns.
Ackman helped rescue General Growth Properties Inc., the second-largest U.S. mall owner, from near-collapse by pushing it to file for bankruptcy, which it did in 2009, when he also won a board seat. The salvage effort “turned $60 million into $1.6 billion,” Ackman told Bloomberg News in 2011, and contributed to his flagship fund’s net return of 29 percent in 2010.
Not all of Ackman’s investments have paid off. At one point in April, losses on his J.C. Penney stake topped $650 million. Pershing Square’s stake in the Plano, Texas-based retailer was about 17.8 percent, compared with about 13.8 percent of Canadian Pacific as of March 31, data compiled by Bloomberg show.
At Canadian Pacific, Ackman campaigned to oust former CEO Fred Green, and won election last year for a board slate that hired his choice as CEO, retired Canadian National Railway Co. chief Hunter Harrison.
Harrison, 68, has helped win over investors since joining Canadian Pacific, with the shares surging 84 percent from June 28, the day before he was named to the job, through yesterday. That compares with gains of 22 percent for Canadian National and 10 percent for the benchmark Standard & Poor’s/TSX Composite Index.
“Our visibility into CP’s operations, our ability to share our input with the board and management on critical issues, the excellent quality of the board and management, and the company’s strong momentum have materially reduced the risk of this position while increasing the long-term profit opportunity,” Ackman told Pershing Square investors in a May 16 letter obtained by Bloomberg News.
Canadian Pacific’s operating ratio, an industry gauge of efficiency that compares expenses to revenue, was 83.3 percent in 2012, exceeding the 71.7 percent average of North America’s largest carriers, according to data compiled by Bloomberg.
The railroad’s ratio was 75.8 percent in the first quarter.
After Pershing Square, Canadian Pacific’s next-biggest shareholder was FMR LLC, parent of Fidelity Investments, with 12.8 million shares as of March 31, according to data compiled by Bloomberg.