Hunter Harrison, Bill Ackman, and Fred Green (Left to right).

30 December 2011

High Probability ex-CNR Head Would Take CP Helm

Toronto Ontario - In his efforts to improve the operations of Canadian Pacific Railway Ltd., U.S. activist shareholder Bill Ackman has reached out to the railway's long-time nemesis, Hunter Harrison, in an attempt to see him replace the company's current chief executive, Fred Green.
 
Mr. Harrison, the former head of rival Canadian National Railway Co., has been retired since 2009. His non-compete contract with CN and other railway companies expires on Saturday (31 Dec 2011), making him the hottest commodity in the industry. Initial talks with Mr. Harrison have been held, and there is a "very high probability" he would accept the position as CP's chief executive if an agreement could be reached and the board approves the plan to replace Mr. Green, sources familiar with the talks said Friday.
 
There is currently no board meeting planned at CP. But if the transition at the top were to occur it would likely happen quickly, possibly within the next few weeks, the sources said.
 
The market reacted favourably to the news Friday with CP's shares jumping 3.74 percent to close at $69.01 on the Toronto Stock Exchange.
 
But while Mr. Harrison has garnered an admirable reputation in the rail industry through his self-styled mantra of "precision railroading," his integration into the management of CP may pose a challenge initially, said Karl Moore, a professor at the Desautels Faculty of Management at McGill University.
 
"There would have to be some hatchets buried just because of the rivalry between the two," he said. "He was the arch rival as CEO at CN."
 
At CN, Mr. Harrison was notorious for holding so-called "Hunter Camps" at which he would drill the culture of operational excellence through precision railroading into his management team. Under Mr. Harrison it was more than simply a business model, it was a way of life. It is also something CN has carried on since his departure.
 
But ultimately, Mr. Harrison would be a dream candidate to succeed Mr. Green, Mr. Moore said.
 
"Clearly, he would be able to roll up his sleeves very rapidly and make some considerable changes at CP," he said.
 
Since his retirement, Mr. Harrison, 67, has shifted his attention to his horse stable business, and could not be reached for comment Friday. He became a legend in the rail business for his hard-nosed approach to improving the fluidity of the railways at which he worked. He joined CN in 1998 as its head of operations after his Illinois Central Railroad was gobbled up by Canada's largest railway. He took over as CEO of CN in 2003, transforming it from a bloated former Crown corporation to the leanest of North America's top-tier railways.
 
CN's operating ratio, an important gauge of profitability measuring operating costs as a percentage of revenue, fell to an industry-leading 67 percent at the point of his retirement from the mid-80s when he joined (the lower the operating ratio the better). By contrast, CP, which has been suffering operational issues all year, had an operating ratio of 82.4 percent year to date at the end of the third quarter.
 
But some of the gains Mr. Harrison made at CN for shareholders came at the expense of its customers. CN's current chief executive, Claude Mongeau, himself an acolyte of Mr. Harrison's precision railroading, has tried to improve those frayed relations with the railway's customers and partners through a series of service agreements.
 
Meanwhile, CP has taken steps in recent months to improve operations by adding more locomotives and building additional slack in its network to deal with disruptions in the winter months. Those efforts also included adding its former head of operations, Ed Harris, who is also the former head of operations for CN, to its board.
 
Positioning Mr. Harrison at the helm of CP is the lynch pin of a turnaround plan led by Mr. Ackman. His New York-based Pershing Square Capital Management LP has been building a position in CP in recent months and now holds slightly more than 14 percent of the company. Mr. Ackman has said he believes CP is undervalued and has not done all it can do to run its network more efficiently under its current leadership.
 
CP, CN, and Mr. Ackman had no comment on the matter.
 
Scott Deveau.