CALGARY (Reuters) - Canadian Pacific Railway Ltd conceded defeat in a bitter proxy battle with New York activist shareholder William Ackman on Thursday, as top level resignations cleared the way for a management overhaul at the country’s second-biggest railroad.
Chief Executive Fred Green and Chairman John Cleghorn both quit after a boardroom coup, a rarity in Canada’s conservative corporate culture.
Victory burnishes Ackman’s reputation as a tenacious activist investor and paves the way for Hunter Harrison, the hard-hitting former chief executive of rival Canadian National, to take the controls at CP.
“We came in peace, and I’m delighted to say that we are at peace once again,” said Ackman to a crowd of about 300 people attending CP’s very brief annual meeting in Calgary.
In a now-famous email to CP called “War and Peace,” Ackman in January repeated a request for board seats and a new CEO. The message, which heralded a frosty turn in relations, said: “Let’s avoid having a border skirmish turn into a nuclear winter. Life is too short.”
In an early morning announcement that represented a big climb down from its previous position, CP said Cleghorn, Green and four other directors would not stand for re-election, opening the door to all seven nominees from Ackman’s Pershing Square Capital Management to join its 16-member board.
The railroad had backed 55-year-old Green as CEO, arguing that customers would not like to see a change in management.
“It would be naive for Canadian boards not to look at this very carefully,” said Paul Taylor, Chief Investment Officer of Fundamental Equities at BMO Asset Management Inc and CP shareholder.
Ackman’s win is one of several recent successes for activist hedge funds after proxy battles, including victories for Daniel Loeb’s Third Point LLC at Yahoo Inc, Sweden’s Cevian Capital at Cookson Group Plc, and Carl Icahn at oil refiner CVR Energy Inc.
Pershing, which first revealed its CP investment in October, spent $1.4 billion for a 14.1 percent share of the company. It was CP’s largest shareholder and the driving force for change.
Ackman said CP’s industry-lagging performance can only be turned around under a new CEO, a view that found favor with institutional shareholders and the proxy firms that advise them.
Ackman’s turnaround plan has hinged on Harrison, who is credited with boosting efficiency at CN by cutting costs and pushing employees to make the trains run on time.
“We anticipate that a new CEO will be named within four weeks of the board initiating the search, with Hunter Harrison ultimately selected as the successful candidate,” RBC Capital Markets analyst Walter Spracklin said in a note.
The board named Stephen Tobias, an Ackman nominee to the board and former Norfolk Southern Corp Chief Operating Officer, as interim CEO. Madeleine Paquin, an incumbent director who was re-elected, was named interim board chair.
After meeting for several hours, the new board also said it had appointed a search committee to identify a permanent CEO.
Founded in the 1880’s to link Canada from coast to coast, CP reinvented itself as a pure railroad a decade ago, spinning off operations that included hotels, coal and shipping.
But its operating ratio, a key industry barometer that measures efficiency, has lagged CN since the mid-1990s.
In the first quarter CP’s operating ratio was 80.1 percent, while CN’s was 66.2 percent. The lower the number, the better the railroad’s performance.
Outgoing chairman Cleghorn, who cordially shook hands with Ackman, wished the new board success.
“We’ve got to have two strong railroads in this country,” he said. “All of us on the board believe Canadian Pacific has a bright future and I am confident that the new board will move forward in a constructive way on behalf of all stakeholders.”
Barclays analyst Brandon Oglenski raised his rating on CP shares to “overweight” from “equalweight,” noting the chance to “nearly double” its earnings base.
“CP does trade near the top of railroad valuations, but with meaningful earnings growth potential, we see significant value in the company’s shares,” he said. He raised his price target on CP shares to $93 from $81.
CP shares added 73 Canadian cents, or 1 percent, to C$76.59 on Thursday afternoon, about 60 percent higher than on September 22, the day before Ackman started buying shares in the railway.
But not everyone welcomed the news of a new CEO. Brian Lancaster, a member of the Teamsters union who has worked at CP for 30 years, said job security was a concern.
“We’re not much better off with Hunter Harrison,” he said before the meeting started. “At CN, there was a lot of discontent amongst employees. No one wants to be in fear of losing his job.”
CP’s new management faces a possible showdown with one of its unions as early as next week. A union representing about 5,000 workers, including conductors and traffic controllers, is in a legal strike position from May 23.
CP, which has put part of the blame for its lackluster operations on the steep Rocky Mountain grades its trains must climb and the region’s frequent avalanches, insists it is on the comeback trail.
It touted quarterly results in April as proof that its improvement plan was on track, but shareholders were not swayed, even as profit quadrupled and operations improved.
Ackman, who ruled out compromise, had won support from several large shareholders and three proxy advisory firms, whose advice to large institutional investors typically influences shareholder votes for or against management.
Ackman will not have control over the 16-member board, but his seven-member slate provides the clout he needs to push for a management change.
($1= $1.01 Canadian)
Additional reporting by Euan Rocha and Allison Martell in Toronto, Writing by Susan Taylor; Editing by Janet Guttsman and Frank McGurty