Investor to Launch Proxy Fight vs. Canadian Pacific

Monday, 09 Jan 2012 04:59 PM

 

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William Ackman's Pershing Square Capital Management is putting together a slate of proposed directors to replace the board of Canadian Pacific Railway Ltd, the activist investor said on Monday.

Ackman's plan to launch a proxy battle to replace CP's board was revealed hours after CP's chairman publicly threw the firm's full weight behind Chief Executive Fred Green and his plan to improve its operating performance.

Ackman has tapped Hunter Harrison, a former Canadian National Railway chief executive as his pick to replace Green, saying Harrison is "excited" about the possibility of running the railway.

Pershing Square built up what is now a 14.2 percent stake in CP last year and is looking at ways to turn around Canada's second biggest railway, which has underperformed its North American peers on various operating metrics.

CP's goal and their plan "is to be the worst-performing railroad in North America," Ackman said, pointing to CP's intention to reduce its operating ratio, an important measure of a railway's productivity.

"A low 70s operating ratio will make it the worst performing railroad in North America. We do not think that is a particularly ambitious goal, nor do we think senior management is capable of achieving their own target," he told Reuters in an interview.

In the third quarter, CP's operating ratio was at 75.8 percent, a level the company is confident it can reduce to the low 70s in the next three years.

The lower the ratio, which measures operating costs as a percentage of revenue, the more efficient the railway.

By comparison, the larger CN reported an operating ratio of 59.3 percent.

 

COMBATIVE CLEGHORN

In a combative letter to CP shareholders, Chairman John Cleghorn criticized Ackman and his plans to replace Green with former CN head Harrison.

He also laid out the merits of CP's existing plans to cut operating costs and raise revenues, and said the company expects to see meaningful performance improvements starting in the first quarter of 2012.

Cleghorn said in an interview that CP had held extensive discussions with shareholders toward the end of last year and received support for its multi-year operating plan

"We are getting positive feedback relative to the company and the plans," he told Reuters.

CP likely has enough support from shareholders to hold off Pershing at least for now, a top executive at one of Canada's leading proxy solicitation firms said.

"I think they have enough goodwill to get a year to show a turnaround," said the executive, whose firm is not working on the CP file.

"I don't see Harrison getting in. I don't think Canadian institutional shareholders would be ready to back him if it got to a proxy contest," he said.

 

OPERATING RATIOS

Cleghorn's letter also revealed more details on Pershing's plans for CP, including its belief that the railroad can achieve an operating ratio of 65 percent by 2015.

"This pace of improvement, from this starting point, has never been achieved by any railway management team," the letter said.

CP, which operates a 14,000-mile (22,400 km) rail network across Canada and into the United States, has struggled to improve its operating ratio and it remains the weakest of North America's large railroads.

Canaccord Genuity analyst David Tyerman was skeptical of a quick fix.

"It's very easy to float numbers, and quite a different thing to actually execute on operating ratio improvement plans," he said in an interview. "I mean, maybe Mr. Harrison is a genius and could achieve it, but I wouldn't be modeling that."

The letter quoted CP's newest board members, railway veterans Tony Ingram and Ed Harris, in support of the company's current plan, which is meant to boost volume, expand capacity and control costs.

Harris, who ran operations at both CN and more recently CP until he retired, warned against comparing the two railroads.

"On the one hand, in CN you have a railroad that was built by Canadian taxpayers with twice the proportion of sidings and double track and that therefore benefits from significantly enhanced operating flexibility. On the other hand, CP has to contend with greater geographic challenges," he was quoted as saying in the letter.

Cleghorn repeated CP's offer to Ackman of a seat on the company's board, saying he looked forward to engaging in "constructive dialogue" with him.

Shares of CP closed 21 Canadian cents higher at C$69.29 on the Toronto Stock Exchange after being weaker for most of the session.

(1=$1.02 Canadian)

© 2014 Thomson/Reuters. All rights reserved.

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