3 May 2012

Harrison Would Cut CP Rail

Calgary Alberta - Canadian Pacific Railway Ltd. has issued another public appeal to its shareholders, saying its board is unanimously opposed to replacing CEO Fred Green with Hunter Harrison, the retired CEO of rival Canadian National Railway.
 
The company's board and management have been waging a public battle with activist investor Bill Ackman, head of the Pershing Square group of funds, who insists Green must be replaced by Harrison.
 
The latest letter issued by CP chairman John Cleghorn says the installation of Harrison would be disastrous for the railway because his approach would require massive spending cuts rather than investments for growth.
 
Pershing Square believes under Harrison's leadership CP can achieve an operating ratio, expenses as a percentage of revenues, and a key measurement of performance in the railway industry, of 65 by 2015. The lower the operating ratio, the better.
 
CP, which reported an operating ratio of 80.1 in its first quarter, has set a target of 70 to 72 for 2014 and between 68.5 and 70.5 for 2016.
 
"Shareholders should ask themselves how deep Pershing Square and Mr. Harrison would cut in order to achieve their unprecedented operating ratio targets," Cleghorn wrote.
 
Public statements by Harrison and Pershing Square imply they plan to cut expenses by $700 million by 2015, which is equivalent to 45 percent of CP's workforce and more than the expense of its entire fleet's leases, depreciation, and maintenance, he said.
 
"In short, Pershing Square is proposing to make drastic and unrealistic cuts to one of the smallest of the Class I railroads to achieve OR targets at a rate that no management team has ever delivered."
 
Cleghorn reiterated the railway has strong customer relationships and it is undertaking measures to grow revenues. Pershing Square, by contrast, is too focused on the cost-cutting side of the equation.
 
"CP cannot cut its way to growth. It must invest to grow."
 
The letter was released as the Globe and Mail reported some of Canadian Pacific's significant shareholders are hoping the two sides will find a compromise before the annual shareholders meeting on 17 May 2012.
 
The newspaper quoted sources as saying Canadian Pacific's board may be willing to support four of the seven nominees Pershing Square wants to install on the board of directors, but would not back Harrison as CEO.
 
CP spokesman Ed Greenberg said in an email the company has heard from many shareholders "who have indicated they would prefer to see a reasonable compromise" before the annual meeting.
 
CP shares were down 59 cents at $76.73 in late morning trading Wednesday on the Toronto Stock Exchange.