25 July 2012

CP Rail Proxy Fight Price Tag Hit $55 Million

Calgary Alberta - The bitter proxy fight for control of CP Rail carried a $55 million price tag, including $13 million in costs and $42 million in expenses specifically related to hiring Hunter Harrison as CEO.
 
Details were released as CP Rail reported lower second-quarter earnings, with a net profit of $103 million, down $25 million from the same period a year ago.
 
That means diluted earnings per share of $0.60, which beat analyst expectations, but profits were significantly impacted by revenue losses from a nine-day strike in May, as well as costs related to former president and CEO Fred Green's departure and Harrison's hiring on 28 Jun 2012.
 
CP also recorded $13 million in costs related to the proxy fight including lawyers and public relations specialists.
 
When Harrison made his desire to take the job at rival CP clear, his former employer CN Railway quickly stopped pension and other payments, totalling close to $40 million, which were due to him. It filed a lawsuit in Chicago, which is ongoing, accusing him of breaching his non-compete agreement.
 
Reimbursement was one of Hunter's conditions before taking the helm of CP, so the firm recorded $16 million in deferred retirement compensation for Harrison, and a $20 million payment to Pershing Square Capital Management, a U.S. hedge fund led by Bill Ackman, which is CP's largest shareholder. Pershing indemnified Harrison against CN's lawsuit. CP also recorded $2 million in associated costs.
 
CP has agreed to indemnify Harrison to a maximum of $3 million plus legal fees. He was also granted stock options worth $12 million.
 
"They're making a big bet from a compensation perspective that he's worth it," said Chris Bart, a professor at McMaster University's DeGroote School of Business. "Hunter Harrison has two years, the classic grace period that the board is going to give him, to turn around the company and work his magic.
 
"A huge issue is going to be, is he a one-trick pony?" Bart said. "He did it at CN, but can he do it here? These are two different companies, with two different cultures."
 
Dofasco thought it could turn around Algoma Steel, Bart noted. "Just because something worked at A doesn't necessarily mean it will work at B."
 
Investors seem to believe it will. At one point, CP shares hit $79.50, its highest intraday level since 2007, before closing up $3.91 to $78.97.
 
CN closed down 48 cents to $86.83.
 
CN also reported earnings Wednesday, with a $631-million profit in the second quarter, or $1.44 per diluted share, up from $538 million a year earlier.
 
Vanessa Lu.