Hunter Harrison, former CEO of Canadian National Railway during a Canadian Pacific Railway Ltd. town hall meeting in Toronto - 6 Feb 2012 Norm Betts.

7 February 2012

Change at CP May Pre-empt AGM

Toronto Ontario - After hearing pitches from Canadian Pacific Railway Ltd. and its activist investor, Bill Ackman, some analysts are expressing doubts that the push to replace the company's chief executive, Fred Green, with venerable railroader Hunter Harrison will make it to a shareholder vote currently slated for May.
 
Ken Hoexter, Bank of America Merrill Lynch analyst, said he suspects CP's board will relent before the company's annual general meeting and withdraw its support for Mr. Green due to the level of support Mr. Ackman's Pershing Square Capital Management LP has received for its bid install Mr. Harrison, the former head of rival Canadian National Railway Co., as CEO.
 
"In meeting with dozens of Canadian investors over the past few weeks, we are still somewhat surprised Canadian Pacific's board has let the acrimony with Pershing's investors deepen, given overwhelming sentiment for change," Mr. Hoexter said in a note to clients Tuesday.
 
"We would not be surprised if a resolution is reached between the parties over the next few weeks, ahead of the 17 May 2012 annual meeting," he added.
 
Mr. Ackman said in an interview this week he remains open to settling the dispute outside of a shareholder vote. He noted that in roughly 25 engagements with managements, including a successful CEO swap at retailer J.C. Penney last year, CP is only the third time Pershing Square has been forced to undertake a proxy vote.
 
"It's possible. Anything is possible," Mr. Ackman said of reaching a settlement before the meeting.
 
But if it is put to a vote, he said the question shareholders will be asked is simple:  "Who's the best guy to run the company going forward? Who's got the best track record turning around Canadian railroads? Hunter Harrison. That's not a faith thing. That's a fact," he said.
 
Benoit Poirier, Desjardins Securities analyst, also believes it is possible Mr. Harrison could be appointed by the board as CEO before May. He said given Mr. Harrison's age, 67, his appointment might attract new talent to CP, including potentially the current CN chief operating officer Keith Creel, who might see it as an attractive avenue to the CEO position.
 
"We believe Mr. Creel could be interested in making the move to CP, given he would have a shot at becoming CEO in the next 3-7 years," Mr. Poirier said.
 
Still, many analysts were left wanting for details on exactly how Mr. Harrison would achieve his goal of getting CP to an operating ratio of 65 percent by 2015 from the 81 percent it stood at in 2011, despite a two-and-half hour meeting in Toronto this week with analysts, shareholders, and the media. Those concerns were also not answered in a private session with analysts Tuesday.
 
CP has, on the other hand, given further details on its own plan to reach a 70 percent to 72 percent operating ratio by the end of 2014.
 
Walter Spracklin, RBC Capital Markets analyst, said management broke down their plan, which relies heavily on higher volumes, in a meeting Friday. He said he was concerned going into the meeting that CP's own plan relied too heavily on the continued improvement in the economy.
 
"However, management gave us comfort that only a fraction of the volume component was predicated on GDP growth over the next several years," he said.
 
He said CP only expects GDP growth of 2 percent to 3 percent in the coming years, and that the remaining volume growth will be derived from repatriating business that was lost last year due to weather-related issues, by expanding on its long-term coal and potash contracts, and by pushing into new markets.
 
Mr. Harrison said in an interview that unlike CP, 90 percent of the improvements he is proposing will come from operational efficiencies through the adoption of scheduled railroading.
 
"It's not based on that revenue side of the ledger," he said. But he has offered few other details outside of that.
 
It appears, however, many are willing to give Mr. Harrison the benefit of the doubt given his track record at CN and Illinois Central, said Christian Wetherbee, Citigroup analyst.
 
"Pershing did not spend much time on specifics of its turnaround, but it may not be completely necessary," he said. "We believe Pershing is making progress with investors based on CP's under performance, particularly its stock which has posted an 18 percent negative return including dividends during Mr. Green's tenure."
 
Scott Deveau.