Ackman Canadian Pacific Proxy Fight Pivots on Ex-CEO’s Work at Rail Rival
New directors “supportive of a change in leadership” would back the hiring of Hunter Harrison, the retired Canadian National Railway Co. (CNR) chief, Ackman said yesterday in an interview. His Pershing Square Capital Management LP is Canadian Pacific’s biggest shareholder.
Harrison, 67, more than tripled net income during seven years running Canadian National with an approach known as “precision railroading.” Ackman has put the retired CEO at the center of his turnaround plan for Canadian Pacific, the least- efficient major railroad in North America.
Half of Ackman’s argument to investors “is going to be what these guys have done wrong” at Canadian Pacific, Chris Wetherbee, a Citigroup Global Markets Inc. analyst in New York, said in an interview. “Half of it is what they could probably do better by instilling some of the virtues that Hunter has done with the precision railroading” at Canadian National.
The gap between Ackman and the board at Calgary-based Canadian Pacific widened yesterday after Chairman John Cleghorn released a letter rebuffing the idea of ousting CEO Fred Green, 55. Ackman responded in the interview that he would seek a proxy fight and that Harrison would be CEO “once we are successful.”
“We are fully, we are unanimously behind our CEO Fred Green and his management team,” Cleghorn said in a telephone interview. Green, who became CEO in May 2006, has “been in the company for a long time. He grew up in the company, and he’s a real team player. He’s been a great recruiter.”
Ed Greenberg, a railroad spokesman, said the company had no further comment on Ackman’s plans. Harrison has declined to discuss Ackman’s campaign at Canadian Pacific.
Given “the globalization of our markets and definitely the fact that Canadian and American businesses are ever increasingly joined by the hip, it’s not unusual for an American shareholder to take an activist stance in a Canadian corporation,” said Michael Schafler, a partner at Toronto law firm Fraser Milner Casgrain LLP.
Ackman invests in companies he deems undervalued and seeks changes to improve shareholder returns. Canadian Pacific’s U.S. shares fell 0.2 percent to $67.63 at the close in New York. They have gained 9.3 percent from Oct. 27, the day before Pershing disclosed its initial stake. The hedge fund’s holding is 14.2 percent, according to a Dec. 13 filing.
The stock probably will be volatile until May, when Canadian Pacific shareholders may vote, because the proxy battle looks poised to drag on until then, Jason Seidl, a New York- based analyst with Dahlman Rose & Co. said in a note to clients yesterday.
Ackman said last week he turned down the railroad’s offer of a seat for him on a board that now has 15 members and asked that Harrison and a nominee whom he hasn’t identified become directors. He told the Wall Street Journal yesterday he will hold a meeting for shareholders next month.
When Harrison retired from Canadian National at the end of 2009, the operating ratio, a measure of efficiency, had been cut to 67.3 from 76 at the end of 2002, filings show. Canadian Pacific’s ratio was 75.8 in 2011’s third quarter, and 77.6 for all of 2010, according to Bloomberg Industries data.
Before running Canadian National, Harrison led Illinois Central Corp., which was bought by the larger carrier in 1998.
He “brings compelling credentials,” Fadi Chamoun, a Toronto-based analyst with BMO Capital Markets, wrote in a note to clients. Making him CEO “could fuel the current momentum in the share price even further,” Chamoun wrote. He and Seidl are among 16 analysts rating Canadian Pacific as hold, according to data compiled by Bloomberg. Six say buy and one says sell.
Harrison helped champion the concept of so-called precision railroading, with trains at set times and trip plans for each car or container to ensure reliable deliveries. Maintaining freight schedules has long been an industry challenge.
He “is intimately familiar with Canada’s customers, unions and relevant regulations,” Ackman wrote in a letter to Cleghorn last week. “He can hit the ground running and effect the transformation faster, better and with less risk than any alternative candidate.”
Canadian Pacific’s board “carefully considered” and unanimously turned down Ackman’s proposal to change leadership, Cleghorn said in the letter to railroad shareholders.
Switching CEOs now would jeopardize a multiyear plan to strengthen Canadian Pacific’s performance, and neither Pershing Square nor Harrison has a detailed strategy to attain the goal of improving the operating ratio, Cleghorn wrote.
Ackman has advocated cutting the operating ratio to 65 by 2015. Cleghorn responded that no railroad has ever posted that rapid an improvement from where Canadian Pacific started, saying that New York-based Pershing failed “to take into account the structural differences that exist between CP and its peers.”
Canadian Pacific’s network runs through the Canadian Rockies and the U.S. Upper Midwest. Canadian National’s track system includes lines in the eastern portion of the country, where elevations are lower, and into the southern U.S.
Canadian Pacific’s plan to lower its operating ratio to the low 70s in the next three years is “solid,” Cleghorn said.
“Management is committed to it, and we think it would be highly disruptive to change all that, to just change at the top for the sake of it, given our unique railroad and circumstances,” Cleghorn said in the interview.
North American railroads have seen showdowns before with activist shareholders. An alliance led by TCI Fund Management LLP won four seats on CSX Corp. (CSX)’s board in 2008 to press for bigger returns to investors. Those directors still were only a third of the total, and TCI sold its 4.5 percent stake in 2009.
Citigroup’s Wetherbee, who has a neutral rating on Canadian Pacific, said “it could be a bit of a challenge” for Ackman’s Pershing to go beyond winning some board seats and get enough control to install a new CEO.
What Ackman may be able to do is argue that the railroad’s plan hasn’t been “effectively implemented” and that he can “leverage the plan that’s in place but with better executors, guys who are more proven,” Wetherbee said.
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