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/The Canadian Press
Canadian Pacific Railway Ltd. got the message.
Within two months of activist investor Bill Ackman buying a 14.2 per cent stake in the company, CP suddenly has two new board members. No one is saying just yet if CP itself drove the appointments, or if Mr. Ackman's Pershing Square Capital Management was behind it, but it doesn't really matter. The main point is that CP is making changes to get its act together.
"Whether Pershing was involved in the decision or whether [it was]a pre-emptive move by CP Rail, we view the announcement as an alignment of shared interests as these two individuals are perhaps the two most qualified in the railroad industry to oversee an operational improvement plan," analyst Fadi Chamoun at BMO Nesbitt Burns wrote in a note to clients.
"Moreover, their appointments could potentially offer a way forward that would avoid a proxy battle, which we believe could prove distracting to management and the board of CP Rail and perhaps even damaging to the company's effort to repair its relationship with its major customers," he added.
That's a key point. And even if Pershing didn't demand these individuals be named, the fact that Mr. Ackman is lurking was enough to get CP to act.
The new board members aren't just anybodies. The first is Tony Ingram, the former chief operating officer of CSX Transportation Inc.. If you recall, CSX, a U.S. rail transportation company, had its own battle with activist shareholders -- the Children Investment Fund and 3G -- in 2006, and Mr. Ingram is credited with turning CSX around. He also has 38 years of experience in the rail industry, having previously worked for Norfolk Southern.
The other appointee, Ed Harris, has 44 years of railroading experience with Canadian National Railway Corp. and Illinois Central.
With these new additions, CP hopes it can get its operating ratio down from 81 per cent to the low 70s, which it highlighted in its strategic plan delivered to investors in June.
Pershing purchased $1.3-billion CP shares, including options over the course of October and November, and now controls 14.2 per cent of the company's outstanding stock. The activist fund is looking to shake up CP in hope of making it a much more efficient company like its Canadian rival CN.
Tim Kiladze