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NEW YORK/TORONTO (Reuters) - Activist investor Bill Ackman wants Hunter Harrison, the retired chief executive of Canadian National Railway, to help engineer a turnaround at Canadian Pacific Railway, a source familiar with the situation said on Friday.
Ackman, whose hedge fund, Pershing Square Capital, has built up a 14.2 percent stake in CP, has suggested to the company's board that Harrison should replace CEO Fred Green, the source said.
CP's shares were up 3.6 percent at C$68.88 in Friday afternoon trading on the Toronto Stock Exchange.
Both CP, Canada's No. 2 railway, and Pershing Square declined to comment.
Ackman's move draws on a strategy he used earlier at J.C. Penney Co Inc. Unhappy with the U.S. retailer's performance and management, the hedge fund manager pushed for bringing in former Apple Inc executive Ron Johnson as CEO. Johnson took over as Penney's CEO on November 1.
Pershing Square has raised questions about CP's poor operating performance and about its management, although earlier this month it said discussions with the Canadian railroad had been productive.
CP, which operates a 14,000-mile rail network across Canada and into the United States, was hurt by heavy snow last winter and flooding over the summer. The company has the weakest operating results among North American Class 1 railways.
In the third quarter its operating ratio, an important measure of a railway's productivity, was 75.8 percent. By comparison, the larger CN reported an operating ratio of 59.3 percent. The higher the ratio, which measures operating costs as a percentage of revenue, the less efficient the railway.
CP's management, led by Green, has laid out a three- to five-year game plan to improve productivity. The plan includes longer trains and sidings and investing in infrastructure corridors where there are bottlenecks.
CP's goal is to improve its operating ratio to the low 70 percent range and increase operating margin to 30 percent from 20 percent over the next two to four years.
Harrison oversaw turnarounds at both Illinois Central Railroad and then, after it was acquired by CN Rail, at CN as well, Morningstar analyst Keith Schoonmaker said. Harrison retired from CN in at the end of 2009.
"I'm not surprised to learn that any railroad in need of a turnaround would be interested in railroading icon Hunter Harrison," Schoonmaker said.
Ackman reached out to Harrison as part of his due diligence in making the CP investment, the source said. Harrison, however, has been constrained so far by a non-compete agreement with his former employer that keeps him from working for a rival.
That agreement expires at the end of this year, the source said, adding that Pershing Square hoped to bring Harrison to talks with CP soon after that.
"Hunter Harrison is really a legend in the railroad industry, and he is the logical guy to do it," the source said, adding Pershing Square expected CP's directors to support Harrison.
In early December, CP appointed two new board members. One was Ed Harris, CP's former chief operations officer, who worked with Harrison at Illinois Central and then at CN.
Canada's Globe and Mail first reported the news.
Reporting by Paritosh Bansal in New York and Allison Martell in Toronto; Editing by Peter Galloway