2012
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A special Passenger Extra West passing Morant's Curve in the Canadian Rockies - Date/Photographer unknown.
28 March 2012
Tampering with Canadian Pacific Risks Canada's National Dream
Toronto Ontario - Is it worth risking an irreplaceable national transportation system for a questionable promise of a couple of extra
pieces of silver?
That's what Canadian Pacific shareholders need to ponder before voting at the railway's annual meeting in Calgary on 17 May 2012. Their dilemma results from a
messy proxy battle launched by Pershing Square Capital Management, a New York hedge fund with ownership stakes in retailers J.C. Penney and Target, as well as
McDonald's and Wendy's.
Pershing Square's CEO, Bill Ackman, wants shareholders to give him the power to drastically revise CP's board of directors, its management, and their way of
running what is already a profitable transcontinental railway. He wants to replace current CP president Fred Green with former CN president Hunter Harrison,
who would return from retirement in the U.S. CP profits and dividends would allegedly increase rapidly thanks to a new corporate culture that would include
large reductions in locomotives, freight cars, and employees.
On the other side of this dust-up is the current CP board. It is headed by former Royal Bank of Canada chairman and CEO John Cleghorn and includes two bright
lights recently brought aboard from the U.S. rail industry, one of whom was Harrison's operations chief at CN. These heavyweights and an outside rail analyst
hired by the CP board endorse the current multi-year growth plan, which was presented to investors in Toronto on 27 Mar 2012. The plan hinges on steady
increases in traffic, revenues, and profits, as well as cost control.
Pershing Square's argument rests on its view that CP has not been performing as well as CN of late. There is some truth in this, but there are also extenuating
factors that are being addressed by CP now. A new management team totally unfamiliar with CP is unlikely to fix these glitches and miraculously unlock hidden
value in something as complex, capital intensive, and physically challenging as a 23,700-kilometre, continent-wide railway. It's like expecting a super sized
steamship to pull a 90-degree turn mid-ocean.
The reality of railroading is that no two railroads are alike. Nor should they be expected to perform identically. CP and CN handle different mixes of freight
traffic, take different routes (even between the same cities), and grapple with different topographical and climatic conditions. These factors can severely
affect performance year-to-year.
The two railways also have widely variant funding histories. From 1919 to 1995, CN was a Crown corporation that enjoyed extensive public support. This left a
plush infrastructure legacy that continues to have a positive effect on its performance as a privatized railway.
As an investor-owned company throughout its 131-year history, CP has always had to run hard to meet the challenges posed by CN, some large U.S. railways that
cross the border, and other forms of indirectly subsidized transportation, such as trucking. These challenges have been met and dividends have been paid
consistently.
If this CP approach is so flawed, why has CN's current president been adopting some of the technologies and customer-friendly service techniques CP has
pioneered and employed for many years?
CP shareholders also need to consider the views of major freight shippers, who have a huge stake in the future of a nation-spanning railway that helps support
Canada's economy, its global competitiveness, and thousands of jobs on, and beyond, its rails. Among those in favour of the CP team's growth plan are the
senior executives of mining giant Teck Resources, Paterson Global Foods, Consolidated FastFrate, and Mosaic, the world's leading producer of potash and
concentrated phosphate.
It's worth recalling the track record of others who promised untold riches if investors just put certain railways in their hands. As the fourth generation of
my family to work in and around the rail industry, I had a ringside seat for the fallout from misguided decisions to install these prophets of profit at the
helm of several U.S. railways. The result was asset stripping, service cuts, line abandonments, employee layoffs, insolvency, and government intervention.
Do unsubstantiated claims of ever-increasing CP dividends make Pershing Square's bid a risk worth taking? Tampering with the railway long known as our national
dream could be dangerous for investors, shippers, employees, and the public. It risks turning CP into a national nightmare. That's no way to run a railway.
Greg Gormick - is a Toronto transportation writer and consultant whose clients have included CP, CN, and VIA. He is currently serving as transportation
policy advisor to MP Dean Del Mastro, who chairs the House of Commons All-Party Rail Caucus.
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