William Ackman, left, shakes hands with Hunter Harrison during a meeting of CP Rail shareholders in Toronto - 6 Feb 2012 Darren Calabrese.

6 February 2012

Pershing Square Blasts CP's Substandard Service

Toronto Ontario - William Ackman's shame train rolled into Toronto Monday as he made his pitch for a management shake-up at Canadian Pacific Railway Ltd. straight to its shareholders.
 
Mr. Ackman and his colleagues detailed during the two-hour presentation what he perceived as the many shortcomings of CP's management and board over the past five years, and what he hoped to accomplish with a management shake-up.
 
The presentation was given at a meeting of roughly 300 shareholders, analysts, and media at Toronto's Hilton hotel titled "CP Rising" that was presented live and on the Internet.
 
Mr. Ackman's New York hedge fund, Pershing Square Capital Management, started building a position in CP last fall and currently owns 14.2 percent of its outstanding shares.
 
Pershing Square has been seeking to replace Fred Green as chief executive of CP with Hunter Harrison, 67, the former head of rival Canadian National Railway Co. in a management shuffle akin to the one Pershing led at retailer J.C. Penny in 2011.
 
"What we need here is a great CEO," Mr. Ackman said during his speech. Mr. Ackman noted during the presentation that the proxy battle at CP is only the second in Pershing Square's eight year history in roughly 25 management engagements.
 
The presentation Monday detailed what Pershing Square considers the shortcomings of CP, including an 18 percent drop in its shareholder value, including dividends, since Mr. Green was appointed CEO in 2006.
 
Paul Hilal, a business partner of Mr. Ackman at Pershing, said that was the result of CP being "less disciplined" and "less efficient" than its rivals. He pointed to the stubbornly high operating ratio at CP, which he said was, in part, the result of not being able to demand higher pricing because of what he called the "substandard service" it was providing.
 
He also claimed that CP's unit costs were rising dramatically out of sync with its competitors, a problem he alleged Mr. Green was only going to exacerbate with his plan to add more locomotives and crews this year to improve service levels.
 
Pershing called the purchase of the Dakota, Minnesota & Eastern Railroad in 2007 a "blunder" and alleged CP had paid a premium of between 30 percent and 40 percent on its purchase.
 
He also pointed to several other operational shortcomings during Mr. Green's tenure, and a lack of investment in the railroad that had led to poorer productivity.
 
He also said there has been "no evidence" that any of Mr. Green's strategies at the railway had yielded any notable results.
 
Mr. Harrison has said he would be able to reduce the company's operating ratio from 81.3 percent last year to 65 percent by 2015 through his strategy of precision railroading.
 
But the move has come up against stiff opposition from CP's board and management who argue that neither Pershing Square nor Mr. Harrison has provided a detailed plan on how that would be achieved. The board and management have instead put their support behind Mr. Green and his plan to reduce the company's operating ratio to between 70 percent and 72 percent by the end of 2014 by increasing volumes and prices, and other productivity improvements.
 
Mr. Harrison also fielded questions from Mr. Ackman during the meeting Monday, but was short on specific details on how to reach his goal other than through a cultural shift at CP towards his so-called "precision railroading" championed at CN and Illinois Central.
 
He said if management could get to an operating ratio of between 70 and 72 percent, and he couldn't get to 65 percent, "You can hang me in Time Square, and you don't have to pay me," he said.
 
He said the last time he was questioned about what he could do with the operating ratio was when he took over at CN. But he said the results he achieved there speak for themselves.
 
Mr. Harrison said he believed so much in the opportunity at CP that he had invested $5-million of his own funds in the railroad Friday. The dispute now appears destined for a vote by shareholders at CP's annual general meeting on 17 May 2012, where Pershing Square will put forward a slate of nominees for the board of directors, including existing members and at least five of its own nominees, which it believes will help push forward its agenda.
 
Those nominees include Gary Coulter, a restructuring expert, Rebecca McDonald, founder and chair of Just Energy Group Inc., Dr. Anthony Melman, a former Onex Corp. executive, and both Mr. Ackman and Mr. Hilal from Pershing Square.
 
Mr. Ackman said he thought he would be able to work with some of the board's existing members, but that it needed an "infusion of new blood" to help turn the railway around.
 
"We think the board has chosen the wrong CEO," he said. He noted that the railway has been through five chief operating officers in five years, and three chief financial officers. He said when you have that sort of turnover in the No. 2 and No. 3 spots in a company, you should be looking at the person in the number one spot. But it's not just CP's management and board who oppose the appointment of Mr. Harrison.
 
Ron Tepper, chief executive of Consolidated Fastfrate Inc., a long time customer of CP, attended the meeting and said in an interview he would consider moving the $50-million in business he does with CP annually to its rival CN if Mr. Harrison were to take over the helm.
 
Mr. Tepper said Mr. Harrison's reputation as a hard-nosed operator preceded him. He said CN under Mr. Harrison had a reputation in the industry often putting the efficiency of the railway ahead of safety and its customers.
 
Mr. Harrison addressed those concerns during his presentations.
 
"I think they're looking for some weaknesses," he said. He said he was very successful at CN with a bunch of customers who didn't like him. "But it's not about liking the CEO," he said.
 
He said the worst criticism he faced at CN was that he made customers to pay their bills, and he claimed CN's customers quickly learned that the reliability of the railway led to greater profitability for both the railway and its customers.
 
Scott Deveau