Bloomberg News

Ackman Rail Plan Attacked by Canadian Pacific as Flawed

March 27, 2012

William "Bill" Ackman, founder and chief executive officer of Pershing Square Capital Management LP. Photographer: Peter Foley/Bloomberg

William "Bill" Ackman, founder and chief executive officer of Pershing Square Capital Management LP. Photographer: Peter Foley/Bloomberg

William Ackman’s pick to lead Canadian Pacific Railway Ltd. (CP) would drive customers away if he employs the tactics he used to boost profitability at larger rival Canadian National Railway Co. (CNR), the smaller carrier said.

Canadian Pacific Chief Executive Officer Fred Green, the man Ackman wants to replace with retired Canadian National CEO Hunter Harrison, said Harrison’s policies damaged some customer relationships and the company he led is now trying to “de- Hunter” itself.

“What the shipper community is telling me, is the thought of imposing what they experienced for that period of time when Mr. Harrison led CN upon this franchise is not a welcome thought,” Green said at an investor meeting today in Toronto. “And they will vote with their market share.”

Green, 55, used the meeting to contrast his own strategy for boosting Canadian Pacific shareholder returns with what he calls defects in the proposal by Ackman, the railroad’s largest investor. The Calgary-based company is seeking support after a poll showed most stockholders want change and support Ackman’s proxy fight to change the railroad’s top management.

Ackman has promoted Harrison as a turnaround architect by citing the retired CEO’s record at Canadian National, which he ran for seven years through 2009. Harrison, 67, cut the operating ratio, a gauge of operating expenses to sales, to 67.3 percent from 76 percent when he took over.

‘Competing Hard’

“Under Hunter’s leadership, CN had a better service record than CP,” Ackman said in an e-mailed statement,’’ Ackman said in an e-mailed statement. “Under Fred Green’s leadership, CP lost market share to CN. As Mr. Green reminds us, customers vote with their feet. Hunter looks forward to competing hard for and earning customers’ business.”

Harrison didn’t immediately respond to messages seeking comment.

Canadian Pacific’s Green pledged today to lower his company’s operating ratio to a range of 68.5 percent to 70.5 percent in 2016 from 78.5 percent in 2011’s fourth quarter. Harrison has proposed cutting the figure to 65 percent by 2015, a rate of improvement that Canadian Pacific says hasn’t been achieved by any of North America’s largest railroads.

That’s “a shot in the dark,” Ed Harris, a Canadian Pacific director who worked at Canadian National with Harrison, said in an interview today.

‘Plain, Flat Wrong’

Oliver Wyman, a railroad consultant commissioned by Canadian Pacific’s board to study differences between the company and Canadian National, reported finding about 560 operating-ratio basis points of structural differences between the two companies. That may mean Harrison’s improvement at Canadian National can’t be replicated at its smaller competitor.

“Virtually every statement made by Mr. Harrison about this franchise has been just plain, flat wrong,” Green said at the investor meeting. “Without ever having stepped foot on the property, without understanding the curves and grades, to make those type of statements, is bold, but it’s not based on fact.”

The competitive information that Harrison and Ackman’s Pershing Square Capital Management LP provided to support their contentions “is flawed and incorrect,” Green said in an interview before the meeting.

Canadian Pacific’s rate of freight sales growth per revenue-ton mile, a gauge of railway shipment volume, has been higher than Canadian National’s since 2005, Green said today. He said Pershing’s analysis of the figure was flawed because it used total revenue, which includes non-rail related sales.

Expense Comparison

Green also rebutted Pershing’s claim that Canadian Pacific’s operating expenses have exceeded its rival’s, noting that operating costs per revenue-ton mile, excluding pension expenses, are comparable with Canadian National’s.

“I don’t mind criticism, but I do think that it’s reasonable to ask that it’s based on facts,” Green said during the meeting.

A poll disclosed this month by Toronto-based research firm Brendan Wood International indicates 73 percent of shareholders favor Ackman’s proposal to install Harrison.

Canadian Pacific fell 1.3 percent to C$77.90 at the close in Toronto. The shares have climbed 27 percent since Oct. 27, the day before Pershing Square disclosed its stake.

The railway’s Dakota, Minnesota & Eastern unit will double earnings before interest, taxes, depreciation and amortization this year, meeting Canadian Pacific’s goal of accomplishing that within five years of buying the business in 2008, the company said.

Buying DM&E, which extended the company’s reach in the U.S. and added volume growth in products such as ethanol, “exceeded our expectations,” Green said.

Ackman has called the $1.48 billion purchase a “blunder.”

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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