Feb. 6 (Bloomberg) -- Canadian Pacific Railway Ltd.’s support for Chief Executive Officer Fred Green doesn’t make sense with the carrier’s performance lagging behind all its North American peers, the railroad’s largest investor said.
“We think the board has chosen the wrong CEO,” William Ackman told shareholders at a meeting in Toronto, where he renewed his call to replace Green with Hunter Harrison, the former head of Canadian National Railway Co. “The results are the worst railroad by a long shot in North America.”
Ackman, the founder of New York-based Pershing Square Capital Management LP, buys stakes in companies he deems undervalued and pushes changes to improve returns. Pershing holds a 14.2 percent stake in Canadian Pacific after becoming its biggest investor last year.
Ackman, 45, arranged the meeting in Toronto to win support for his slate of five directors, a group that he said would help persuade the board to dismiss Green and bring in Harrison to run the Calgary-based railroad. Green, 55, has led the carrier since 2006.
Canadian Pacific rose 1.2 percent to C$74.32 at the close in Toronto. It was the fourth straight daily gain for the shares, the longest such streak since Jan. 4.
“Ackman presented a very strong case for change,” Cameron Doerksen, an analyst with National Bank Financial Inc. in Montreal, wrote in a note to clients. He has an “underperform” rating on the shares. “It will be difficult for CP shareholders not to support Pershing Square’s board nominees and we increasingly believe that CP’s board will lose a proxy battle.”
Harrison, 67, has said he can cut the ratio of expenses to sales at the railroad to 65 percent in 2015. Montreal-based Canadian National, the country’s biggest rail carrier, saw net income more than triple during Harrison’s seven-year tenure as he improved the company’s margins.
Canadian Pacific said Pershing isn’t giving “concrete suggestions” for the gains it’s seeking.
“It appears that Pershing Square still has no plan or clear timetable to improve CP’s operations,” based on today’s presentation, the company said in a statement. Pershing “has provided no specific actions to support its hypothetical math” and a management change “would cause serious disruption to CP’s business,” the railroad said.
Canadian Pacific has said that reaching Pershing and Harrison’s operating ratio target from the starting point of 77.6 in 2010 has never been achieved as quickly as they suggest by any railroad management team.
The company has changed its own forecast for the operating ratio, which gauges efficiency by comparing expenses to revenue, to a range of 70 to 72 by 2014 from an earlier target of the “low 70s.”
Ackman said that while proving what the actual operating ratio will be at a future date is impossible, investors should consider whether Green or Harrison has the greatest likelihood of achieving the desired goal.
“We’ve got to find a starting point for getting there,” Harrison told Ackman during a question-and-answer session with the hedge-fund manager during the meeting. “This thing might be a little longer than I thought because I was saying four years and everybody’s got ‘15, but we’ve got to figure out where we start.
“There’s no reason that franchise cannot move over time to a 65 operating ratio,” he said. “I’m a railroader. What I want to do is get on with this. I wish we didn’t have to wait” until board elections in May to start, Harrison said.
The CEO nominee told Ackman, “If they can go to 70 or 72 and I can’t go to 65, you can hang me in Times Square and you don’t have to pay.”
--Editors: James Langford, Ed Dufner
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