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CP ranks as the least efficient of North America’s Big Six railways, with operating costs equalling 82.4 per cent of its revenue in the first nine months of 2011. (Jack Kuiphoff/Canadian Pacific Railway/Jack Kuiphoff/Canadian Pacific Railway)
CP ranks as the least efficient of North America’s Big Six railways, with operating costs equalling 82.4 per cent of its revenue in the first nine months of 2011. (Jack Kuiphoff/Canadian Pacific Railway/Jack Kuiphoff/Canadian Pacific Railway)

COVER STORY

The fight for control of Canadian Pacific Railway Add to ...

When he flew to Montreal three weeks ago to meet with senior officials of Canadian Pacific Railway Ltd., Bill Ackman came bearing a thick, limited-edition book.

The weighty volume is Mr. Ackman’s signature opening move. Ever since the New York-based shareholder activist founded Pershing Square Capital Management LP in 2003, nearly two dozen undervalued companies, including Wendy’s International Inc., Target Corp. and J.C. Penney Co. Inc. have received an Ackman book. The confidential studies, often the product of months of work by Pershing Square’s analysts and consultants, are detailed blueprints for boosting long-term profits at companies in his crosshairs.

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CP shareholders can expect to learn within the next several weeks whether Mr. Ackman’s book will be embraced by the company as a road map to recovery or a declaration of war.

Mr. Ackman’s funds have spent $1.2-billion (U.S.) to acquire a 12.4-per-cent stake in CP, becoming the railway’s largest shareholder. If the 130-year-old railway’s board of directors agrees to yield to the brash 45-year-old, shareholders can expect a range of moves that could include management changes, extensive cost cutting and asset sales, sources say.

Should the freight carrier instead seek to rebuff Mr. Ackman’s proposals for change, the company and its blue-chip directors, including Suncor Energy Inc. chief executive officer Rick George and former Royal Bank of Canada chief John Cleghorn, face the prospect of a very public and noisy power struggle that could redefine the boundaries of shareholder influence in Canada’s historically passive investor community.

In this match, Mr. Ackman is challenging a century-old institution that helped knit together a country, nurtured regional economies and now transports an ever-increasing share of Canadian resources bound for booming Asian markets.

If CP’s well-connected directors opt to challenge Mr. Ackman, the investor would be facing his biggest fight yet with the business establishment. Spokespersons for CP and Pershing Square declined to comment about their discussions.

Most of the 23 companies Pershing Square has targeted in the past eight years have bowed to Mr. Ackman’s pressure for change. Two were dragged into proxy battles after they balked. He won the fight for board representation on Ceridian Corp., a U.S. payroll company, but lost the contest with the Target retail chain. Both involved bruising public campaigns against directors, but his thwarted two-year quest to shake up Target took shareholder activism to a new level of high drama.

During a speech to Target shareholders at a 2009 annual meeting in Wisconsin, the grey-haired activist, whom company insiders dubbed “the silver fox,” likened his shareholder rebellion to John F. Kennedy’s famous call to fight foreign tyranny. Invoking the late president’s 1961 inauguration speech, Mr. Ackman choked up and wiped away tears when he said: “We will pay any price, bear any burden, meet any hardship.”

The theatrical moment failed to persuade enough shareholders to vote for Mr. Ackman’s dissident slate of directors at the meeting, but his activism had an impact. In the wake of Pershing Square’s proposals, Target has sold or put up for sale most of its credit card assets. Since then, the retailer’s widely admired chief marketing officer defected to work for one of Mr. Ackman’s more obliging turnaround targets, J.C. Penney.

The activist has privately vowed he will never again wait more than a few months for a company to heed his demands for change, according to people familiar with Mr. Ackman’s failed Target campaign. The investor has since sold most of his holdings in the retailer.

Slow to innovate

The arrival of such a restless and powerful investor could not have come at a worse time for CP chief executive officer Fred Green. Since he was named CEO in 2006, Mr. Green, 54, has been fighting an uphill battle to keep up with more profitable competitors such as Canadian National Railway Co., which began investing heavily in the late 1990s to upgrade its tracks, and improve its train speeds and service. CN now ranks as the industry’s most efficient railway.

“Some of things that CP is doing now are, in some respects, catching up to what CN has been doing for a while,” said National Bank Financial Inc. analyst Cameron Doerksen.

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