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The Globe and Mail

CP road show aims to secure investors' backing

Fred Green president and chief executive of Canadian Pacific Railway.


In duelling bandwagon campaigns, Canadian Pacific Railway Ltd. 's directors and executives will embark on a road show this week, just days before activist investor Bill Ackman arrives in Toronto to promote his pick for a new CP chief executive officer.

Each side in the proxy battle is hoping to persuade institutional investors to support their vision for making the Calgary-based railway more efficient.

In a new letter to employees, CP CEO Fred Green said the railway has a solid plan in place to reduce its operating ratio, a key indicator of productivity that measures costs as a percentage of revenue.

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"Starting this week, members of our board and management team are going on the road to meet with investors and discuss the significant progress we made against our multiyear plan," Mr. Green said in the letter.

A lower operating ratio is better, but CP posted a ratio of 81.3 per cent last year, lagging rival Canadian National Railway Co.'s industry-leading 63.5 per cent. In meetings scheduled for Canada and the United States this week and next, CP will detail its strategy for reducing its operating ratio to an average of 70 per cent to 72 per cent for 2014.

In a 23-page slide presentation to be unveiled to institutional shareholders, CP explains that it plans to decrease its operating ratio by moving more cargo, charging higher freight rates, strengthening its fuel-surcharge program and reducing costs.

Headwinds, however, include CP's defined benefit pensions, depreciation from capital investment and spending on information technology.

RBC Dominion Securities Inc. calculates that CP's improvement program over the next three years will cut 13.8 percentage points off its annual operating ratio, but the headwinds will add four points.

Montreal-based CN's "trans-Canada track faces fewer topographical and weather-related challenges than does CP's," credit rating agency DBRS Ltd. noted in a research report. "CN has consistently reported an operating ratio that leads the market by a wide margin."

Mr. Ackman, chief executive officer of New York-based hedge fund Pershing Square Capital Management LP, wants to replace Mr. Green with Hunter Harrison, who retired as CN's CEO at the end of 2009.

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Pershing Square, CP's largest shareholder, began acquiring CP stock last September and now owns a 14.2-per-cent stake.

Mr. Harrison and five director-nominees, including Mr. Ackman, will converge on a Toronto hotel on Monday for Pershing Square's town hall for CP investors. Mr. Ackman and Mr. Harrison have said they believe the railway's operating ratio can be chopped to 65 per cent by 2015.

Pershing Square is urging CP shareholders to elect a minority slate of five alternative directors at the railway's annual meeting on May 17 in Calgary: Mr. Ackman and his Pershing Square colleague Paul Hilal, corporate restructuring specialist Gary Colter, former Onex Corp. executive Anthony Melman and Just Energy Group Inc. executive chairwoman Rebecca MacDonald.

Mr. Green kept a low profile in the weeks after Pershing Square disclosed its CP investment in late October. But he has now written two memos to employees in the past two weeks to defend CP's efficiency drive.

CP is strongly backing the current 15 directors, saying they have the experience required to help guide the railway through its recovery plans.

In its presentation, CP argues that there is a "deep understanding of the business for the eight independent directors that have served over 5-10 years" and "fresh perspectives from the six new external directors in the last four years – overall average tenure just over five years." Mr. Green also serves on the railway's board.

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After $1.1-billion in capital spending last year, CP is budgeting up to $1.2-billion in capital expenditures in each of 2012, 2013 and 2014. The multiyear investment includes upgrades to CP's Edmonton-to-Winnipeg route, new locomotives and improvements to the main line that carries coal to the Port of Vancouver.

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