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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)

CP sets up for proxy battle with brush off of Ackman Add to ...

Activist shareholder Bill Ackman is going to have to force the issue if he really wants management change at Canadian Pacific Railway Co., which is starting to lay the groundwork by making the case to shareholders why CP's current plan is the best.

Canadian Pacific Monday issued a long letter to shareholders brushing off Mr. Ackman's demand to replace current chief executive Fred Green with former Canadian National Railway CEO Hunter Harrison.

CP last week in an earlier letter prompted by Mr. Ackman did not throw its support behind Mr. Green by name, leading to some speculation he didn't have the full board support. This time, the board made it clear that Mr. Green is its man, and declared that Mr. Ackman's hope that CP can overcome the historical issues (fewer sidings, steeper tracks than CN) with a quick improvement in efficiency under Mr. Harrison is folly. Once again, CP dismissed Mr. Ackman's proposals for the company as far short of a credible plan.

Mr. Ackman has a couple of choices here.

He can walk, likely at a profit. Much of his stake was likely accumulated when CP was trading in the $50-$60 range in October, before he disclosed his position at the end of that month. The stock is now nudging up against $70. To be sure, unwinding a stake as big as his (about 24-million shares, according to Bloomberg) is not going to be easy to do without hurting the market.

At the other end of the spectrum, he can take a shot at removing the board.

He has the power to requisition a shareholders meeting and force the issue with a proxy fight to change the board, then management. His stake, at 14 per cent, is big enough to demand a meeting and CP would have to call it within 21 days.

Mr. Ackman could also wait and file a dissident proxy at CP's annual meeting, which last year was held in May.

The advantages of a requisition are it keeps the heat on CP by forcing the timeline, and allows the dissident more power to set the agenda. Waiting for the CP meeting is a slightly friendlier tack that leaves the door open for a bit more negotiation.

Either way, Mr. Ackman would have a credible shot at winning. Given that turnout at a contested large company annual meeting is usually in the range of 60 per cent to 70 per cent, Mr. Ackman's 14 per cent puts him a long way ahead.

CP's open letter to shareholders, read in full, gives a sense of a board that knows that it may face a vote for control of the company soon and is beginning to lay out its case.

The full letter follows:

Dear Fellow Shareholder:

I am writing to provide you with an update on Canadian Pacific’s Multi-Year Plan and certain developments affecting your investment in the company. CP’s Multi-Year Plan has three key elements – driving volume growth, expanding network capacity to safely and efficiently support higher volumes and controlling costs. CP's management team is aggressively executing on the company’s Multi-Year Plan and has the full support of the Board of Directors. The Board is working closely with management and monitoring the company’s performance and will continue to hold CP’s President and Chief Executive Officer, Fred Green, and CP’s senior management, fully accountable for delivering on the Multi-Year Plan. This plan has been specifically designed to generate the best possible operational and financial results from CP’s unique assets and circumstances.

The Board is confident in CP’s ability to reach an operating ratio (“OR”), or operating expenses as a percentage of revenue, in the low 70s in the next three years. We will not stop there – as we achieve our goals, we will set new targets.

As early as 2010, the results of management’s execution against the Multi-Year Plan could be seen in a four hundred basis point improvement in OR. The company responded to an economic rebound that exceeded both CP’s and our customers’ expectations by a significant margin, handling an unprecedented 17% increase in workload. Our 2011 actions have included increasing our locomotive fleet and manpower to improve reliability for customers, and position ourselves for future growth. Today, as management continues to execute on the Multi-Year Plan, we expect to deliver meaningful improvements in CP’s financial performance starting in the first quarter of 2012.

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