January 20, 2012 / 9:33 PM / in 6 years

Canadian Pacific trumpets support for recovery plan

(Reuters) - As pressure mounts from an activist investor, the head of Canadian Pacific Railway (CP.TO) came out campaigning for his recovery plan - and job - on Friday, with a letter to employees that trumpets shareholder and customer support for his turnaround scheme.

The latest volley in an increasingly heated and public tussle with shareholder William Ackman and his Pershing Square Capital Management, CP Chief Executive Officer Fred Green also said the railway was keen to speed up the pace of improvements.

The letter, posted on the CP’s website, did not set any new targets for the railway’s lackluster performance or shed new light on the improvement plan.

Green repeated that CP expects “meaningful improvements” in its operating ratio - a key industry metric - starting in the first quarter of 2012.

“We are determined to further accelerate the pace of change at CP and to safely deliver significantly improved operational and financial results,” Green’s letter said.

“I think they’re reaching to find things in how to respond,” said Edward Jones analyst Brian Yarbrough. “There’s nothing new there.”

Canadian Pacific is fighting back against a planned proxy battle by Ackman, who wants the former chief executive of rival Canadian National Railway (CNR.TO) to take the reins at CP and more quickly improve its operating ratio.

CP, which lags its North American peers in the key efficiency measurement, wants to improve its operating ratio to the low 70 percent range by 2013 from 78 in 2010.

The lower the ratio, which measures operating costs as a percentage of revenue, the more efficient the railway.

Ackman, whose company has built up a 14.2 percent stake in CP, argues that former CN boss Hunter Harrison can get the operating ratio down to 65 percent by 2015, a target that CP does not believe its achievable, Green wrote.

“This pace of improvement, from this starting point, has never been achieved by any railway management team,” the letter said. “In fact, it took Hunter Harrison seven years to lower CN’s OR from 75 to 65 during a strong economic period and one in which CN significantly grew revenues through acquisitions.”

When Harrison arrived at CN in 1998, the operating ratio was 75.1. When he became CEO in 2003, the ratio had fallen to 69.8 percent and for several years before the financial crisis it came in below 65.

“At the end of the day, you look at his (Harrison‘s) result and his track record speaks volumes,” Yarbrough said. “Unfortunately for Fred, you’re comparing him to a railroad icon. It’s like comparing Wayne Gretzky to your average hockey player.”

SUPPORT FROM CEOS

The chief executives of diversified miner Teck Resources Ltd TCKb.TO, CP’s largest customer, as well as fertilizer producer Mosaic Co (MOS.N) had statements in the letter that supported Green’s leadership.

Shareholders meeting with Chairman John Cleghorn have also endorsed the recovery plan, the letter said. “The board is working closely with management, monitoring the company’s performance, and holding all CP employees accountable,” Green wrote.

Canada’s second-biggest railway released its 2012 capital spending plan this week, which commits up to C$1.2 billion for infrastructure renewal, network improvements and expansion projects.

Green’s letter to staff is the latest exchange in an increasingly combative war of words between the railway and Pershing Square.

“I think you’re going to continue to see this public spatting,” said Yarbrough.

In a letter to shareholders January 9, Cleghorn criticized Ackman and his plans, while laying out the merits of CP’s existing operating plan. Ackman replied that a new CEO was necessary to unlock CP’s potential.

CP, which reports fourth-quarter financial results on January 26, operates a 14,000 mile rail network across Canada and into the United States.

CP shares were down 1.4 percent on the Toronto Stock Exchange on Friday at C$71.56.

Reporting By Susan Taylor in Toronto; editing by Rob Wilson

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