Bloomberg News

Canadian Pacific May Face Takeover Pressure as Ackman Buys Stake

November 01, 2011

Oct. 31 (Bloomberg) -- Canadian Pacific Railway Ltd. may face pressure to sell the company after William Ackman’s Pershing Square Capital Management LP bought a 12.2 percent stake and said it expects to hold talks with management.

Warren Buffett’s Berkshire Hathaway Inc., owner of Burlington Northern Santa Fe, may be a buyer, Peter Nesvold, a Jefferies & Co. analyst, said in a note today. RBC Capital Markets’ Walter Spracklin said an acquirer such as a Canadian pension fund would be more likely than another railroad.

“The key questions on the minds of investors will be to what extent Pershing Square will be able to trigger significant change,” Spracklin, who is based in Toronto, said today in a note to clients. He said the shares may rise as high as C$80 in a year, up from a projected C$66, and recommends buying them.

Ackman, 45, invests in companies he deems undervalued and then urges changes he says will boost shareholder returns. In the past year, New York-based Pershing Square has bought stakes of more than 10 percent in Fortune Brands Inc., the maker of Jim Beam bourbon now known as Beam Inc. after a spinoff, and J.C. Penney Co., the third-largest U.S. department store chain.

Pershing Square disclosed its Canadian Pacific stake, which includes call options, after trading ended on Oct. 28. Canadian Pacific, the country’s second-largest railroad, was little changed at $64.56 at 10:15 a.m. in New York. Most U.S. equities slumped.

Railroad Silence

Canadian Pacific hasn’t reacted publicly to the Pershing Square holding, and Ed Greenberg, a company spokesman, declined to comment today. Executives at the Calgary-based railroad met with financial and legal advisers over the weekend to discuss options after the announcement, the Globe & Mail reported.

Telephone and e-mail messages left for comment with Ackman weren’t returned.

Buffett’s Berkshire may be a possible buyer of Canadian Pacific in the event Pershing Square urges a “strategic tie- up,” Nesvold said in his note.

Acquiring Canadian Pacific would give Burlington Northern access to the entire western U.S. and Canada, Nesvold wrote. A joint venture with Kansas City Southern, which would create the first trans-North American railroad, might also “be worth further study,” Nesvold wrote.

Financial Buyer?

Spracklin wrote that while government regulations make a sale to another railroad unlikely, a financial buyer such as a Canadian pension plan is more probable. Operational changes are constrained by railroad regulations, safety requirements and Canadian Pacific’s unionized workforce, Spracklin said.

Buffett didn’t immediately respond to a request for comment sent to an assistant. Bill Galligan, a spokesman for Kansas City, Missouri-based Kansas City Southern, didn’t immediately respond to a voice mail seeking comment.

Canadian Pacific is led by Chief Executive Officer Fred Green, who became CEO in 2006. He joined the railroad in 1978 and was president and chief operating officer before taking the CEO’s post. He is a member of the board, which is chaired by John E. Cleghorn.

The carrier has lagged behind North American peers this year, falling 4.5 percent through Oct. 27, the day before Pershing Square’s stake was disclosed. Canadian National Railway Inc., the country’s largest railroad, climbed 20 percent in the same period, and Standard & Poor’s 500 Railroads Index of three U.S. carriers advanced 11 percent.

Weather has snarled Canadian Pacific’s operations, damping earnings and sales, said Lee Klaskow, a Bloomberg Industries analyst.

Profit, Sales

Third-quarter profit of C$1.10 a share, including a 4-cent one-time expense, compared with analysts’ average estimates of C$1.11, while sales of C$1.34 billion compared with a projection of C$1.35 billion, according to results released last week.

Pershing Square began building the stake in September, according to the filing. The holding consisted of 20,659,504 common shares, including 2.65 million common shares through call options, the filing showed.

“While it is hard to predict whether Pershing’s involvement will result in a management change or major asset divestiture, we believe it could ultimately benefit shareholders,” Jason Seidl, a Dahlman Rose & Co. analyst in New York, said in a note to clients today. “Even if no significant changes occur, the involvement of a new large activist shareholder could drive CP management’s efforts to improve execution to shift into higher gear.”

Operations and Infrastructure

One change Pershing could implement would be separating track infrastructure from operations, wrote Seidl, who has a “hold” rating on Canadian Pacific. Nesvold said the hedge fund may pressure Canadian Pacific to raise prices.

Canadian Pacific’s biggest businesses by revenue in 2010 were so-called intermodal shipments and grain. Intermodal containers can move by a mix of rail, highway and sea, often carrying consumer goods. The carrier operates on 14,800 rail miles across six Canadian provinces and 13 U.S. states, and has a workforce of 15,460 employees, according to its website.

Pershing Square’s holding isn’t the first time the railroad has drawn interest from a large investor. In 2007, the company rebuffed what it called a “highly conditional” takeover approach in 2007 from Brookfield Asset Management Inc., an owner of buildings, ports and power plants.

That was the same year that Buffett disclosed his initial stake in Burlington Northern, and railroad and real estate company Florida East Coast Industries Inc. agreed to be acquired by buyout firm Fortress Investment Group LLC. Brookfield Asset Management isn’t involved with Pershing’s move, Globe & Mail reported.

In 2008, activist hedge funds TCI Fund Management LLP and 3G Capital Partners Ltd. won four board seats at CSX Corp., the biggest U.S. eastern railroad, in an election upheld by a court after a challenge from the carrier.

Pershing Square has ventured into Canada before. In 2006, when the hedge fund owned a stake in Sears Canada Inc., Ackman was among investors upset by the retailer’s rejection of a December 2005 offer from parent Sears Holdings Corp. to buy the 46 percent of the Canadian company it didn’t already own. He accused Sears Holdings of bullying minority shareholders.

--With assistance from Katherine Burton, Saijel Kishan and Erik Schatzker in New York. Editors: Ed Dufner, James Langford

To contact the reporter on this story: Natalie Doss in New York at ndoss@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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