February 8, 2012 / 12:57 AM / 6 years ago

Analysis: Ackman scores early in Canadian Pacific fight

TORONTO (Reuters) - William Ackman has momentum working in his favor in his battle to shift the balance of power on Canadian Pacific Railway’s board and install his hand-picked candidate as chief executive of North America’s worst-in-class rail operator.

Ackman’s Pershing Square Capital Management, which holds 14.2 percent of CP, may have the upper hand after a “town hall” meeting he hosted in Toronto on Monday, analysts and investors say.

The activist investor staged the event to formally introduce shareholders to Hunter Harrison, the man credited with turning around rival Canadian National Railway, and to sketch out his vision for a more efficient CP, the country’s No. 2 railway.

Even though the session may have fallen short on specifics, Ackman appears to have cast his plan for CP in a favorable light, even as the company maintained that the current CEO, Fred Green, deserved more time to make progress.

“If I were a betting person, I would be betting on Pershing Square prevailing, based on what I‘m hearing,” said Canaccord Genuity analyst David Tyerman.

While cautioning that he is working from a small sample, Tyerman said he had spoken with a few large shareholders, and all said they would vote with Ackman, who argues that a new CEO could remedy CP’s poor operating efficiency.


Todd Johnson, portfolio manager at BCV Asset Management, was convinced before Monday’s meeting. BCV, which manages about C$330 million ($332 million) in total, holds about 87,000 CP shares for his clients, and has managed holdings in the company for more than five years.

“I think there’s a compelling case, and there’s really little downside for a change in management,” he said, calling Harrison an excellent CEO with a strong track record at Canadian National. “From a shareholder perspective, it’s really hard to say that you’d rather stay with the status quo and hope for the best.”

That lines up with what Citigroup Global Markets analyst Chris Wetherbee said he was hearing from investors.

“There’s probably a better chance than not that they’re successful in placing at least a few people on the board,” he said, which would “certainly increase the odds” of new management.

With only a minority slate up for election at CP’s May 17 meeting, Pershing’s team would have to win over other board members in order to install Harrison.

Wetherbee says investors believe Harrison, credited with turning around Illinois Central before joining CN, lends the Pershing campaign credibility.

He sees the stock, which is has risen nearly 20 percent over the past three months, as a sign the market believes Ackman is likely to succeed. CN’s stock fell 3 percent in that time frame and the overall Toronto market is up less than 1 percent.

“I think CP is on their heels,” said Brad Allen, senior vice president at proxy solicitation firm Laurel Hill Advisory Group, which is not involved in the conflict. “Momentum’s definitely, in my mind, on Ackman’s side currently.”

That said, Allen pointed out that momentum in proxy fights, which in some way resemble political campaigns, is often with whatever side has been in the spotlight most recently. Whether Ackman can build on his current advantage remains to be seen, he said.

CP’s management has repeatedly criticized Pershing for not giving specifics on how the company could reach Harrison’s target operating ratio of 65 percent by 2015.

A lower ratio, which measures what percentage of revenue is needed to run the railway, signals greater efficiency - and generally, higher profitability.

At 81.3 percent, CP’s operating ratio is the weakest of North America’s six big railroads. CP argues it has a credible plan to bring the ratio down to 70 to 72 percent for 2014.

“Shareholders have expressed support for CP’s detailed plan,” said CP spokesman Ed Greenberg. “Pershing Square continues to offer no plan or clear timeline.”


On Monday, Pershing focused on comparing Harrison and Green’s track records and the need for cultural change at CP, rather than dwelling on the operational details of what Harrison might be planning for CP.

Michael Sprung, president of Toronto-based Sprung Investment Management, which owns a “small number” of CP shares, said he would like to see more specifics from Pershing, if possible.

“I think people would like to have a few more specifics, but as outsiders it’s hard to say how much information they really have at their disposal,” he said.

That information gap could work to CP’s advantage in fighting back, according to Allen.

“They need to certainly press that advantage into clearly communicating both at the investor level, and winning the PR battle as well,” he said.

But Johnson, for one, doubts the company could do enough to change his mind.

“I don’t see what they could do that would convince me otherwise, that bringing in Harrison as a new CEO wouldn’t be a positive change for CP,” he said.

($1 = $0.99 Canadian)

Additional reporting by Nicole Mordant in Vancouver; Editing by Frank McGurty

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