The U.S. hedge fund manager who has emerged as the largest shareholder of Canadian Pacific Railway Ltd. is expected to initiate talks with the company as early as this week in a bid to prompt a strategic review of its operations.
William Ackman, chief executive officer of Pershing Square Capital Management LP, disclosed late Friday that his New York investment firm has bought 12.2 per cent of CP. The information came in a so-called 13D filing with U.S. regulators – a filing usually made by investors who intend to take an active role in pushing for change at a public company.
Mr. Ackman has a history of working “inside the tent” with executives and directors to restructure businesses for long-term gains, rather than trying to pressure underperforming companies to enter takeover discussions. Relying on what he has called his “reputational equity,” Mr. Ackman seeks to win boardroom support for major shifts that can include changes in products, operations and management.
CP’s senior executives huddled with the company’s financial and legal advisers in Montreal on the weekend to review options following the Friday announcement of Pershing’s $1-billion (U.S.) investment in the railway, said sources familiar with the matter. The move underscores the seriousness with which Mr. Ackman is being taken, especially given the company’s recent record: Its stock has been badly outperformed by rivals such as Canadian National Railway Ltd. and Norfolk Southern Corp.
The value of Pershing’s investment in CP has already surged about 26 per cent, based on the hedge fund’s average acquisition price of $54.46 a share and CP’s after-hours close of $68.99 in New York on Friday night.
CP traces its history back to 1881, when it was formed to build Canada’s first transcontinental railway, a vital link that helped knit together a vast and sparsely populated new nation. In modern times, CP hasn’t kept pace with Canadian National, which has steadily become more efficient under its “precision railroad” strategy, turning what was once a bloated operation into the envy of the North American train sector.
CP’s performance has lagged under chief executive officer Fred Green when compared with Montreal-based CN, the country’s largest freight carrier. CP officials declined comment Sunday.
In 2006, Mr. Green took over as CP’s top executive amid the rail sector’s renaissance – a period of booming trade with Asia. Exports of potash, coal and grain surged with rising commodity prices and made-in-China consumer goods poured into North America. But then the global economy began to sour in 2008, and global trade contracted sharply in the aftermath of the financial crisis that fall.
By late 2008, Mr. Green embarked on a cost-cutting campaign titled Execution Excellence for Efficiency, or E3. CP featured initiatives such as running longer trains and renegotiating fuel contracts with freight customers. The company has also been trying to reduce the amount of “dwell time” of freight left at terminals while workers get the trains ready. So far, the progress has been slow at railyards.
Every railway encounters severe conditions, but Mr. Green found himself on the hot seat after CP suffered more weather-related setbacks than any other North American freight carrier in 2011. CP’s average train speeds in the first nine months of this year declined 10.8 per cent to 33.1 kilometres an hour, compared with a year earlier.
In the first nine months of this year, CP’s profit fell 25 per cent to $348.5-million (Canadian) while CN’s profit climbed 16 per cent to $1.86-billion.
Analysts watch a key indicator called operating ratio, which measures operating costs as a percentage of revenue. CP had an operating ratio of 82.4 per cent in the first nine months of this year, compared with 77.8 per cent in the same period last year. A lower operating ratio is better, and while CP’s nine-month performance worsened, CN’s ratio improved to 63.1. It’s unclear how Mr. Ackman might propose improving CP’s efficiency.
Part of the reason for the wide gap is that CP’s tracks go through steeper B.C.-Alberta mountain terrain than CN lines. But even accounting for the geography, industry observers have questioned why CP isn’t more efficient.
To help tackle the weather challenges, CP has been hiring hundreds of staff. Its work force grew to 16,675 people at the end of September, or 633 extra employees compared with a year earlier.
CP hit a record high of $91 (Canadian) a share in July, 2007. A group led by Brookfield Asset Management Inc. looked at acquiring CP in a leveraged buyout that year, but the idea was shelved amid a global credit crunch. Sources say Toronto-based Brookfield is not involved with Pershing’s move on the railway.