A Dakota Minnesota & Eastern Railroad train appears in Huron South Dakota, USA - Date unknown Associated Press.

11 February 2012

Canadian Pacific Fight Focuses on Dakota Minnesota & Eastern

Toronto Ontario - Canadian Pacific Railway Ltd. defended its US$1.48 billion purchase of a U.S. regional rail line after its biggest shareholder, William Ackman, called the acquisition a "blunder."
 
Buying Dakota, Minnesota & Eastern Railroad Corp. in 2008 brought "an attractive return on capital" and is "continuing to generate strong revenues and earnings," Chief Executive Officer Fred Green said in a letter to employees.
 
The letter responded to Ackman's presentation earlier last week to shareholders and analysts in which he cited the purchase as an example of poor management that he's seeking to fix by replacing Green with Hunter Harrison, 67.
 
Canadian Pacific takes the opposite viewpoint, describing the acquisition as strategically important. Buying DM&E extended the Calgary-based company's reach into the U.S. Midwest and provided access to fast-growing markets for energy and industrial products such as ethanol, Green said in the letter.
 
For nearly 15 years, DM&E pushed a US$6 billion proposal to extend its railroad 278 miles to access surface coal mines in Wyoming's Powder River Basin, currently served by BNSF Railway and Union Pacific. Most of eastbound coal crosses Nebraska on UP and BNSF tracks.
 
DM&E operates about 1,100 miles of track in South Dakota, Minnesota, Iowa, Wyoming, and Nebraska. Sister company Iowa, Chicago & Eastern Railroad has 1,400 miles of line in Illinois, Iowa, Minnesota, Missouri, and Wisconsin, and was consolidated into the DM&E in 2008. DM&E has a branch that reaches south to Crawford, Nebraska.
 
In 2009, the DM&E suspended its effort to become a Powder River coal carrier, blaming the economy. 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.
 
The railroad board is backing Green, 55. Ackman's New York-based Pershing Square Capital Management LP plans a proxy battle at the annual shareholder meeting in May, championing a five-director slate to help replace the CEO. Pershing owns a 14.2 percent stake in Canadian Pacific.
 
Ackman who invests in companies he considers undervalued and pushes changes to improve returns.
 
He has promoted Harrison as a turnaround architect by citing the retired CEO's record at Canadian National Railway Co., which he ran for seven years through 2009.
 
Dakota, Minnesota & Eastern Railroad Corp. cost more than it was worth, Ackman said in an interview. Ackman cited the DM&E deal as an example of poor decision-making that he said would be remedied by ousting Green.
 
Calgary-based Canadian Pacific bought the DM&E to expand access to the Midwestern ethanol and coal markets.
 
Canadian Pacific has trailed North American peers on benchmarks such as operating ratio, a gauge of profitability, since Green became CEO in 2006, Ackman said.
 
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.
 
"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."