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CP's big investors hint they favour change

If Bill Ackman continues to attract support, CP’s board will come under increased pressure to strike a settlement with the activist, or face the prospect of a defeat at the ballot box.

Pawel Dwulit/The Canadian Press/Pawel Dwulit/The Canadian Press

In the elegant private dining room of Sassafraz restaurant in Toronto on Monday night, Bill Ackman sat down with investors who will make or break his bid to replace the management of Canadian Pacific Railway Ltd.

Earlier that day, Mr. Ackman had delivered a stinging public attack of CP chief executive officer Fred Green's record before an audience of hundreds of people. Now, the activist wanted to hear from fund managers representing 15 of CP's largest shareholders.

When Mr. Ackman asked the men and women sitting at a long wooden table for their response, the fund managers delivered a clear message that they favour change at CP, according to people familiar with the discussion.

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Although none of the fund managers has yet submitted his or her proxy for Mr. Ackman's alternative slate of five directors at CP – the May vote is still three months away – the private gathering hints at growing momentum for the activist's campaign to shake up Canada's oldest railway.

The surest sign of Mr. Ackman's support is CP's runaway stock price. The company's shares have risen by more than 50 per cent since his hedge fund, Pershing Square Capital Management, began accumulating its 14.2-per-cent CP stake late September. In the past two days, as Mr. Ackman outlined his case for new leadership, the stock has risen 3 per cent, closing Tuesday at $75.60 on the Toronto Stock Exchange.

The higher the stock soars, the more difficult it becomes for investors to vote against his slate.

"It seems to me that he will win this proxy fight. The higher the stock goes up, the more the shareholders are incentivized to vote with Ackman," says Bill Holland, executive chairman of CI Financial Corp., which owns less than 2 per cent of CP shares and did not attend the dinner meeting.

"If we go back to the status quo at CP, the stock will drop right back to where it was."

Mr. Ackman declined to comment on the Monday dinner. A spokesman for the railway said it is too early to predict the outcome of the May 17 vote. CP chairman John Cleghorn, Mr. Green and some directors, including former Westcoast Energy Inc. chief Michael Phelps, are currently travelling to a number of U.S. and Canadian cities to meet with investors.

These investors, the spokesman said, "have expressed support for CP's detailed plan." The railway ranks as the least efficient of North America's top six players, but the company is promising to aggressively reduce its operating costs to as little as 70 per cent of revenue by 2014. Last year, operating expenses consumed 81.3 per cent of CP's revenue.

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The company has dismissed Pershing's call for new management as insufficient because its plans are vague.

If Mr. Ackman continues to attract support, CP's board will come under increased pressure to strike a settlement with the activist, or face the prospect of a defeat at the ballot box.

CI Financial's Mr. Holland said he regards Mr. Cleghorn as a "bright and thoughtful guy" who should consider the option of reopening discussions with Mr. Ackman. The latter was invited in December to join CP's board of directors, but talks broke off after Mr. Ackman resisted some of the terms and began campaigning publicly to replace Mr. Green with Hunter Harrison, the retired former chief executive officer of Canadian National Railway Co.

Mr. Ackman has said he is prepared to meet with CP's board, but the company said as a first step it wants the activist to accept a seat on the company's board, which is bound by law to act in best interests of the company.

"CP continues to stand by the offer of a seat on the board to Bill Ackman, so a constructive board-level dialogue based on all relevant facts and information can commence," its spokesman said.

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