Bloomberg News

Canadian Pacific Defends Rail Deal Ackman Sees as ‘Blunder’

February 09, 2012

(Updates with DM&E markets in fourth paragraph.)

Feb. 8 (Bloomberg) -- Canadian Pacific Railway Ltd. defended its $1.48 billion purchase of a U.S. rail line after its biggest shareholder, William Ackman, called the acquisition a “blunder.”

Buying Dakota, Minnesota & Eastern Railroad Corp. in 2008 brought “an attractive return on capital” and is “continuing to generate strong revenues and earnings,” Chief Executive Officer Fred Green said in a letter to employees.

The letter responded to Ackman’s presentation earlier this week to shareholders and analysts in which he cited the purchase as an example of poor management that he’s seeking to fix by replacing Green with Hunter Harrison, 67.

Canadian Pacific takes the opposite viewpoint, describing the acquisition as strategically important. Buying DM&E extended the Calgary-based company’s reach into the U.S. Midwest and provided access to fast-growing markets for energy and industrial products such as ethanol, Green said in the letter.

The combined railroad now carries more than 1.1 billion gallons of ethanol, compared to the 390 million gallons that DM&E carried previously.

“DM&E will play a key role in achieving the volume growth outlined in our Multi-Year Plan,” Green wrote.

Proxy Battle

With the railroad’s board backing Green, 55, Ackman’s New York-based Pershing Square Capital Management LP plans a proxy battle at the annual shareholder meeting in May, championing a five-director slate to help spur a CEO change. Pershing owns a 14.2 percent stake in Canadian Pacific.

Ackman, who invests in companies he deems undervalued and pushes changes to improve returns, said in a Bloomberg News interview this week that Harrison would assess whether to keep DM&E.

He has promoted Harrison as a turnaround architect by citing the retired CEO’s record at Canadian National Railway Co., which he ran for seven years through 2009. Harrison cut the ratio of expenses to sales at that company to 67.3 from 76 when he took over.

Canadian Pacific’s own operating ratio climbed to 78.5 in the fourth quarter, the highest among large North American railroads that have reported earnings for the period so far.

--Editors: James Langford, John Lear

To contact the reporter on this story: Natalie Doss in New York at

To contact the editor responsible for this story: Ed Dufner at

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