CN says dissident shareholder made ‘misleading’ claims

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Canadian National Railway Co. has fired back against a dissident shareholder, urging investors to support its turnaround plan as it defends itself in a battle for the boardroom.

CN accused The Children’s Investment Fund Management Inc. (TCI) Friday of making “misleading” claims about its performance and said the British hedge fund has a “conflict of interest” because it also holds shares in rival Canadian Pacific Railway Ltd.

TCI partner Ben Walker dismissed CN’s accusations as “comical” and stood by the criticism of CN’s financial and stock market performance. “Our view on CN’s underperformance solely relates to CN,” Mr. Walker said in an interview.

TCI, unhappy with CN’s financial returns and failed attempt to buy Kansas City Southern railway, is waging a contest for control of CN, Canada’s largest rail carrier. The fund, owned by Christopher Hohn, has called for a vote to oust the railway’s chairman, chief executive officer and two directors. CN has until Oct. 7 to schedule the vote on TCI’s slate of candidates. TCI plans to nominate four directors, including rail veteran Gilbert Lamphere as chairman. Former CN and Union Pacific Railroad operating chief Jim Vena is its pick as for CEO.

CN first responded to TCI’s pressure on Sept. 17 with the announcement of 1,050 layoffs, a share buyback to boost stockholder returns and a plan to boost profit by $700-million.

“CN maintains an open and constructive dialogue with its shareholders, including discussions about areas where we can improve our business performance, but we will not indulge unfounded and bad-faith arguments that serve the interests of one shareholder over others – or of one of our competitors over CN,” Jean-Jacques Ruest, CN’s CEO, said in a statement Friday.

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CN said it will slash costs to reduce its 2022 operating ratio, a closely watched comparison of sales and expenses, to 57 per cent. Its operating ratio in 2020 was 65.4 per cent, lagging most rivals, including CP and Union Pacific, whose ratios were 57.1 per cent and 59.9 per cent, respectively.

Christian Wetherbee, a stock analyst at Citigroup in New York, said CN’s lagging performance has left it open to criticism from TCI. Mr. Ruest’s operational improvements do not go far enough, Mr. Wetherbee said, and the 57-per-cent operating ratio target is “out of step” with investors’ expectations.

“Our perception is there is a sizable group of shareholders who have concerns about the relative performance of Canadian National over the last couple of years,” Mr. Wetherbee said in an interview. “And I think that … does leave room for TCI and Jim Vena.”

In an interview published Monday, Mr. Hohn told The Globe and Mail that CN’s leadership is “weak” and has made operations errors that have eroded the company’s financial performance.

He pointed to the purchase of non-rail interests such as trucking company TransX and Great Lakes ships, businesses Mr. Ruest has said will likely be sold.

TCI recently became CN’s second-biggest shareholder, with a 5.2-per-cent stake worth about $4-billion. The hedge fund, a winner of a handful of boardroom battles at major companies, is also CP’s largest investor, with an 8-per-cent stake. The fund’s other investments include Union Pacific and Microsoft Corp. Since the beginning of 2018, when TCI first bought into CN, the railway’s share price has risen about 40 per cent, whereas CP and Union Pacific shares have climbed 82 per cent and 44 per cent, respectively.

CN argues TCI is not properly measuring CN’s financial performance and said quarterly results should be compared on a 12-month trailing basis. However, this is not the way CN or other companies report their financial results.

CN also said it benefited from making the KCS bid because it gained a US$700-million termination fee and forced CP to pay more for its proposed takeover of KCS.

TCI’s Mr. Walker said CN cannot take credit for either of those outcomes; they happened “solely due to luck,” because the U.S. regulator delayed the release of its rejection of a key part of CN’s takeover bid. “They are making themselves out to be geniuses,” he said.

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