* CP says its shareholders would prefer compromise
* Ackman says chance of compromise "almost zero"
* Proxy vote set for May 17
By Euan Rocha
TORONTO, May 2 (Reuters) - Canadian Pacific Railway Ltd indicated on Wednesday it is willing to negotiate a compromise with activist investor William Ackman, but Ackman said the chances of a deal ahead of a showdown shareholder vote later this month were "almost zero."
The main obstacle to a compromise appears to be a battle over who should be at the helm of CP, Canada's No. 2 railroad.
Ackman's hedge fund, Pershing Square Capital Management, wants CP Chief Executive Fred Green to be replaced by Hunter Harrison, the former head of Canadian National Railway.
CP has so far stood by Green, but at least one report now hints that it now may be willing to talk about replacing him. CP, however, is refusing to even consider Harrison for the job.
Pershing, CP's top shareholder with a 14.1 percent stake, contends that CP has been mismanaged, and it has named a slate of seven candidates for election to CP's board of directors. Pershing's nominees are competing directly against CP's own slate.
Shareholders are set to vote on the rival slates at the company's annual meeting on May 17 and some recent shareholder polls indicate that most institutional shareholders favor the Pershing Square nominees.
"CP has heard many of its shareholders who have indicated they would prefer to see a reasonable compromise worked out before the May 17 annual meeting," said CP spokesman Ed Greenberg.
"Mr. Ackman's recent public statements indicate he is opposed to a compromise. If that changes, we would be pleased to have discussions towards a constructive resolution that would be in the best interests of CP and all its shareholders."
CP's comments represent a marked change in tone from the more aggressive stance that the railroad has taken since Ackman launched his drive to replace Green late last year.
Ackman, however, said there was little chance of a compromise with CP ahead of the shareholder vote. "CP needs a mandate for change from the shareholders. If the shareholders don't get a vote, how do we have a mandate?" he asked.
"I don't know that this is something that can get resolved. We are always open to compromise, but I do not think you can compromise a shareholder's right to exercise and express what they want. That's why I think the probability of a settlement here is very close to zero."
Ackman said that CP and its chairman, John Cleghorn, have not reached out to Pershing since discussions between the two sides broke down in January.
"Pershing Square has always been, and remains, committed to advancing the best interests of the company and its shareholders," he said. "If Mr. Cleghorn or other directors have ideas they wish to discuss with us consistent with that objective, they should call me."
A recent poll by consulting firm Brendan Wood International of CP institutional shareholders, representing about 45 percent of the shares in the company, found that a vast majority favor Pershing Square's slate of directors. A Reuters poll last month also indicated a similar trend.
Proxy advisory firms Institutional Shareholder Services Inc ISS and Glass Lewis are both expected to weigh in on the proxy battle soon. If Pershing's slate wins an endorsement from the firms, momentum could swing further in its favor.
Pershing has promised to improve CP's operating ratio, which is a key measure of a railroad's efficiency. CP contends, however, that the cost cuts required to achieve Pershing's stated 65 percent operating ratio goal are unrealistic.
The Globe and Mail newspaper, earlier on Wednesday, reported CP may offer to back at least four of Ackman's seven candidates for the board. The report, citing sources familiar with the matter, said CP opposes the plan to name Harrison as CP's new CEO but is prepared to commit to a search for a new chief to replace Green.
A source close to CP said, however, the company is not looking to replace Green and stressed it has not retained the services of an executive search firm.
Sources close to Pershing told Reuters that some of CP's shareholders have informed it that CP is open to a compromise that could include replacing Green, but that the railroad will not even consider Harrison. They said also that Pershing will not agree to a deal that excludes the former CN Rail head as a potential CEO.
Shares of CP closed 12 Canadian cents higher at C$77.44 on the Toronto Stock Exchange on Wednesday. The stock ended the day up 14 cents at $78.46 in New York.