Canadian Pacific Railway Ltd. ’s chief executive officer is defending a major U.S. railway division and standing up for CP directors after facing attacks this week from a U.S. hedge fund.
On Monday, New York-based activist investor Bill Ackman described CP’s 2008 acquisition of Dakota Minnesota & Eastern Railroad Corp. as a blunder, charging that CP “irresponsibly financed” the $1.48-billion (U.S.) takeover of DM&E. Mr. Ackman, chief executive officer at Pershing Square Capital Management LP, said CP vastly overpaid for DM&E and didn’t gain any compelling strategic advantage.
But Mr. Green blasted back on Wednesday, saying the DM&E purchase allowed CP to smartly diversify its North American network.
“The acquisition of the DM&E brought in a team of top-level railroaders and, most importantly, further extended the reach of CP into the U.S. Midwest, a vital part of our network,” he said in a letter to employees.
The U.S. operation helped the CP-DM&E combination to almost triple the amount of ethanol shipped annually, compared with the volume handled by the regional railway in 2008, he noted.
Mr. Green also responded to Mr. Ackman’s criticism that CP’s board of directors has set lax performance targets for management.
“Contrary to Pershing Square’s assertions, the board holds CP’s senior management team accountable for the financial results of the business,” Mr. Green said. “From vice-presidents upwards, 75 per cent of at-risk compensation is based on CP’s financial performance targets set by the board.”
More than 92 per cent of the compensation for CP’s independent directors was provided in deferred share units over the past couple of years, he added.
Mr. Green’s letter to staff contained testimonials from Ron Tepper, CEO of transport logistics firm Consolidated FastFrate Inc.; and Doug Tozer, CEO of Wheels Group. a supply-chain company.
New York-based Pershing Square, CP’s largest shareholder, is waging a proxy contest against the freight carrier in an effort to oust Mr. Green and replace him with Hunter Harrison, who retired at the end of 2009 from Canadian National Railway Co.
“It is important that we not get distracted but remain focused on our responsibilities and objectives,” Mr. Green said in his letter. His remarks came after Mr. Ackman delivered a stinging public attack of CP on Monday at a gathering in Toronto, with hundreds in attendance and listening on a webcast.
CP’s shares have jumped by more than 55 per cent since Pershing Square began accumulating its 14.2-per-cent stake in late September.
Pershing Square and Mr. Harrison argue that they would be able to reduce CP’s operating cost-to-revenue ratio to 65 per cent by 2015.
Mr. Green countered that CP, which is budgeting about $1.2-billion (Canadian) in capital spending this year, has a plan to chop its operating ratio from last year’s 81.3 per cent. Calgary-based CP has been improving its train speeds and cutting the amount of time that freight is left at rail yards.
“These achievements have set us firmly on track to deliver on our goal of bringing CP’s [operating ratio]down to 70 to 72 per cent for 2014,” he wrote in his letter. “Pershing Square continues to offer no plan or clear timetable for the improvement of CP’s operations.”
CP chairman John Cleghorn, Mr. Green and some directors, including former Westcoast Energy Inc. chief Michael Phelps, have been travelling to a number of U.S. and Canadian cities to meet with investors.
If Mr. Ackman continues to attract support, CP’s board will come under increased pressure to strike a settlement with the activist, or face the prospect of a defeat in the proxy vote set for May 17.
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