Bill Ackman - Date unknown Pawel Dwulit.

8 February 2012

Ackman Open to Canadian Pacific Undoing $1.48 Billion Deal

Toronto Ontario - William Ackman, the investor seeking a management change at Canadian Pacific Railway Ltd., said his proposed chief would consider selling a rail carrier acquired for $1.48 billion in 2008.
 
Dakota, Minnesota & Eastern Railroad Corp. cost more than it was worth, Ackman said yesterday in an interview after urging Canadian Pacific shareholders to back Hunter Harrison, his choice to be chief executive officer. Ackman's Pershing Square Capital Management LP is Canadian Pacific's biggest investor.
 
"Are there changes that can be made that make that a more important asset?" Ackman said in Toronto. "Or is it more valuable to someone else and we'd rather take that capital and redeploy it in another part of the business?"
 
Ackman cited the DM&E deal as an example of poor decision making that he said would be remedied by ousting CEO Fred Green and hiring Harrison, the retired chief of Canadian National Railway Co. Calgary-based Canadian Pacific targeted the DM&E to expand access to U.S. Midwest ethanol and coal markets.
 
Pershing Square's founder hammered at railroad management during a so-called town hall meeting with investors at a Toronto Hotel, breakout sessions, a press conference, and the interview. The carrier has trailed North American peers on benchmarks such as operating ratio, a gauge of profitability, since Green became CEO in 2006, Ackman said.
 
DM&E is "going to be one of the things that Hunter is going to analyze when he gets there," Ackman said.
 
Ackman History
 
Ackman, who invests in companies he deems undervalued and pushes changes to improve returns, owns a 14.2 percent stake in Canadian Pacific. With the board backing Green, 55, Ackman plans a proxy battle at the annual shareholder meeting in May, championing a five-director slate to help spur a CEO change.
 
Ed Greenberg, a Canadian Pacific spokesman, didn't have an immediate comment on Ackman's remarks about DM&E.
 
Canadian Pacific rose 1.7 percent to $75.60 at the close in Toronto. It was the fifth straight daily gain for the shares, the longest such streak since 14 Dec 2011.
 
The railroad agreed to buy Sioux Falls, South Dakota-based DM&E in 2007 and won U.S. approval for the transaction the following year. Before the purchase, closely held DM&E had planned to spend $6 billion on a new line into Wyoming's Powder River Basin, where U.S. carriers Union Pacific Corp. and Burlington Northern Santa Fe load coal from the area's mines.
 
Great Property
 
Chief Financial Officer Kathryn McQuade said in May that stagnating growth in coal shipments from the region doesn't justify the costs of such an expansion. She also said DM&E was "a great property" and helped Canadian Pacific expand its agricultural and ethanol businesses.
 
Ackman, 45, called the DM&E deal a "blunder" in Pershing's presentation to investors earlier in the day.
 
"Most people think that CP paid 30 or 40 percent too much for this asset," Paul Hilal, a Pershing partner and Ackman board nominee, told shareholders. "That could be understood if there was a massive strategic imperative to buy this railroad, but if there was one, it was never explained to investors."
 
A Bank of America Corp. analyst said Ackman and railroad management might settle their disagreement before the May meeting because there's "overwhelming sentiment for change" among investors.
 
"We would not be surprised if a resolution is reached between the parties over the next few weeks," Ken Hoexter, a New York-based analyst at Bank of America Merrill Lynch, wrote in a note to clients after yesterday's presentation, citing meetings with "dozens" of Canadian investors.
 
Turnaround Architect
 
Ackman has promoted Harrison as a turnaround architect by citing the retired CEO's record at Canadian National, which he ran for seven years through 2009. Harrison, 67, cut the operating ratio to 67.3 from 76 when he took over. The ratio compares expenses with revenue.
 
Canadian Pacific has changed its own forecast for the operating ratio to a range of 70 to 72 by 2014 from an earlier target of the "low 70s." It was 78.5 last quarter, 1.5 points higher than a year earlier.
 
Harrison has said he can cut that ratio to 65 in 2015, while Canadian Pacific counters that no railroad has ever reached such a goal from the starting point of 77.6 in 2010 as quickly as Pershing proposes. Canadian Pacific also says it's a mistake to underestimate the differences between the company and its larger Canadian rival.
 
Ackman said in the interview that Harrison believes Canadian Pacific and Canadian National shouldn't have a "meaningful gap" between their operating ratios.
 
Negatives, Positives
 
"There are some negative things about CP versus CN," he said, noting steeper Canadian Pacific grades in some areas. "There are also some benefits. The nature of the markets they serve allows them to run some so-called unit trains, which are more efficient to operate. Net net, we felt there wasn't a material difference."
 
Ackman defended his slate of directors' lack of railroad experience, saying the board shouldn't consist only of rail executives.
 
"You want a couple of directors with good railroad expertise, we've got that," Ackman said in the interview. "So we intentionally sought out people with other diverse business backgrounds."
 
Harrison could begin making changes at Canadian Pacific "immediately," Ackman said.
 
"Hunter wants to get started tomorrow. He's prepared and ready to go."
 
Frederic Tomesco and Natalie Doss.