A month before a showdown over who should run Canada’s second biggest railroad, more than half of the shareholders in a Reuters survey favour activist investor Bill Ackman’s slate of candidates over Canadian Pacific Railway Ltd's existing board.
Several respondents said that even the strong first-quarter results CP expects to report on Friday won’t persuade them to stick with CP’s incumbent directors and chief executive Fred Green.
And they said Hunter Harrison – the well-known former CEO of Canadian National Railway Co. , who is Mr. Ackman's Pershing Square Capital Management’s pick to head CP – has more of what it takes to transform North America’s worst-in-class railway into a potent operator than does Mr. Green.
“A relentless pursuit of efficiency and improvement is seemingly lacking in the current operation. Sometimes it just comes down to drive and execution, which I think Hunter has,” said Jim Huang, president and portfolio manager at Toronto-based T.I.P. Wealth Manager Inc., which owns a small number of CP shares.
New York-based hedge fund Pershing is CP’s biggest shareholder. It is pushing hard to shake up the company, starting with installing Mr. Harrison at the top, and has put forward a slate of seven new director nominees to be voted on by shareholders at the railroad’s annual meeting in Calgary on May 17.
In the Reuters survey, conducted between April 11 and 17, five shareholders, including three large holders, said they would back Pershing. One shareholder said his firm would support CP, and three were undecided. Reuters attempted to survey more than 50 shareholders and nine responded.
Those who said they are in the Pershing camp account for about 5 per cent of CP’s shares. If Pershing’s own 14.1 per cent stake is added, then almost one-fifth of the railway’s shareholders seem sure to back the fund’s plan for change.
Last month, a poll by consulting firm Brendan Wood International of about a third of CP shareholders found that 91 per cent of them want a management change.
Backing CP in the Reuters survey was Toronto-based fund manager Morgan Meighen & Associates Ltd, which owns about 150,000 CP shares.
“Our basic central approach as fund managers is to go with management unless we see something fraudulent or criminal. If there are improvements to be made, there are other ways to do it,” said Michael Smedley, executive vice-president and CEO of Morgan Meighen.
CP’s slate consists of 15 existing directors plus Mr. Ackman, to whom the railway has offered a board seat.
Senior executives at several funds and banks told Reuters that both sides have been lobbying shareholders vigorously.
The election of Pershing nominees to CP’s board would not automatically mean Mr. Harrison will become CEO. However, strong support for Pershing’s minority slate will send a clear message to the board that shareholders want change, and installing Mr. Harrison as CEO has been Pershing’s central demand.
The railway said last week it expects to report a four-fold jump in first-quarter earnings, helped by record operating results.
Several shareholders said they were not overly impressed.
“The current management team has had a long enough time to show whatever they can do and it has obviously not come to fruition until this last quarter,” said a large shareholder who requested anonymity because his firm does not discuss investment decisions with the media.
The flashpoint in the fight has been CP’s operating ratio, which measures efficiency by tallying how much revenue is required to maintain operations. The higher the ratio, the less efficient the operation.
At 81.3 per cent, CP has the weakest operating ratio of North America’s big railways. By comparison, CN, where Mr. Harrison was CEO from 2003 to 2009, had a ratio of 63.5 per cent last year.
Pershing and Mr. Harrison have said they can improve the ratio to 65 per cent within four years. CP says it can get to 70 to 72 per cent by 2014 and to 68.5 to 70.5 per cent by 2016.
“I don’t believe the Ackman-Hunter Harrison target, at least not by 2015. And the target set by CP is more achievable, but the question is: Is the right team to achieve it running CP?” said another shareholder whose firm’s policy is not to comment to media.
CP has met with shareholders for months to make the case for its turnaround plan and has called the upcoming annual meeting “one of the most important in its history.”
After viewing the Reuters poll, a CP spokesman said the railway’s focus was on that vote. “CP has thousands of shareholders. We note that this survey includes nine of them. The only vote that counts is on May 17,” said Ed Greenberg.
Pershing Square could not immediately be reached for comment.
CP shares were up 11 cents at $76.19 on the Toronto Stock Exchange Thursday.
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