8 May 2012

Pershing Wins Further Support for CP Shakeup

Toronto Ontario - Activist investor Bill Ackman has received another endorsement for his push for management change at Canadian Pacific Railway Ltd. with a third proxy advisory firm giving his plan its support. Glass Lewis & Co. said it is recommending shareholders vote for all seven of the nominees for CP's board put forth by Ackman's Pershing Square Capital Management L.P. in the current proxy battle, and withhold their votes for several incumbent directors, including chairman John Cleghorn, chief executive Fred Green, as well as two recent additions, Ed Harris, and Tony Ingram.
 
"We believe the dissident presents a compelling case for the need to overhaul CP's current leadership," the advisory firm said in its report. "We also agree that simple board representation isn't likely to produce the results that shareholders desire. Rather, an injection of all seven of the dissident's nominees is warranted."
 
Pershing Square has been seeking to replace Green as chief executive with Hunter Harrison, the former head of Canadian National Railway Co., which has been opposed by the board.
 
Glass Lewis said Pershing's position was "fairly straightforward and realistic" with the installment of Harrison as chief executive its centrepiece.
 
"We believe this proxy contest boils down to two things:  execution and culture," it said in its report. "Installing a team at CP that can execute an efficiency and profitability plan and also introduce a new leadership style appears to be the missing component for improved results."
 
At the same time, Glass Lewis urged shareholders to withhold votes for several other directors "based on their unyielding support for Mr. Green, their lengthy tenures overseeing CP during periods of under performance, or their culpability in allowing the company to remain a laggard for so long."
 
In addition to Cleghorn, Green, Harris, and Ingram, Glass Lewis encouraged shareholders to withhold their support for incumbent directors Michael Phelps, Roger Phillips, Tim Faithfull, and Madeleine Paquin, as well.
 
"Given the current board's widespread loyalty and backing of Mr. Green, and its stiff-arming of Mr. Harrison, the appointment of new directors appear(s) necessary to follow through with the dissident's plan," Glass Lewis said.
 
While it blamed the constant turnover of executives at CP, in part, for its chronic under performance, including five chief operating officers and three chief financial officers under Green's six-year tenure, further change was needed.
 
"Investors should ask themselves whether they should grant the existing leadership yet another chance at redemption merely to maintain a sense of stability or should they endorse a sweeping change in the executive leadership in hopes of long-term value creation," it said.
 
Glass Lewis is the third major proxy advisory firm to endorse Pershing Square's slate of nominees for the board in its entirety.
 
Egan-Jones Proxy Services released its own report to that effect Tuesday, while Institutional Shareholder Services Inc. said it supported Pershing Square's position last week and encouraged shareholders to vote for its slate as well as some of the company's incumbent directors at the CP annual general meeting on 17 May 2012.
 
"We are delighted that proxy advisors Glass Lewis and Egan-Jones have joined ISS in strongly endorsing change at CP," said Ackman, in a statement.
 
"We are unaware of so powerful and uniform an endorsement for change in the history of large-cap activism," he added.
 
Fadi Chamoun, UBS analyst, said it appeared Pershing Square was poised to win seats for all seven of its board nominees.
 
He said he would expect that after the 17 May 2012 shareholder meeting, the company will conduct a CEO search, which he said will result in Hunter Harrison's appointment.
 
"A management team leading from the point of view of operations could be what the company needs to improve assets utilization and service levels on a sustained basis going forward," he said.
 
"We believe that an improvement in operating performance at CP Rail over the next few years could result in a significant increase in operating margins and free cash flow. We believe Hunter Harrison is likely to be successful in achieving a turnaround," he added.
 
Scott Deveau.