William Ackman’s victory in a proxy fight to replace Canadian Pacific Railway Ltd. (CP)’s chief executive officer shifts investors’ focus to how fast new leadership can deliver on the hedge-fund manager’s promise to boost returns.
“What can Bill Ackman do with it from here?” said John Stephenson, who helps manage $2.7 billion at First Asset Investment Management Inc., which owns Canadian Pacific shares. “Now that he’s got his baby, he’s got to make it work and that will be much harder.”
Investors now may have to wait at least a year and as long as four to see significant improvements to profitability and returns, analysts and investors said. Before today, stock in North America’s least-efficient major railroad gained 23 percent after Ackman said in October his Pershing Square Capital Management LP had become the largest investor.
The first task for Ackman and the Calgary-based railroad’s new board is selecting a successor for CEO Fred Green, whose resignation was announced hours before a shareholder vote at today’s meeting.
Green’s simultaneous withdrawal from board elections, along with that of five other incumbents, left nine railroad nominees along with the seven proposed by Pershing to fill the 16 seats.
‘We Will Deliver’
A preliminary vote tally confirmed their election during a meeting that lasted less than half an hour. Afterward, the new board named Stephen Tobias, a director Ackman nominated and the former operating chief of Norfolk Southern Corp. (NSC:US), as interim CEO and appointed a search committee to fill the position permanently.
Madeleine Paquin was named acting board chairman. John Cleghorn, who previously held the post, was among the board members who chose not to seek another term.
The CEO the new directors select will take the helm of a company that has lagged behind its peers on profitability measures since Green took the top job in 2006.
While Ackman championed hiring Hunter Harrison, the 67- year-old former CEO of rival Canadian National Railway Co. (CNR), he has said the board will conduct a search for the best leader. There isn’t an “enormous number of candidates” for the position, he said.
“Proxy contests are never fun for anyone involved, but they’re critical to the proper functioning of the capitalist system,” Ackman said during the meeting. “We will not make progress overnight but we will deliver on our commitment to make this railway one of the best railways in the world.”
‘Take a While’
Not much will happen in the next 12 months, predicted Robert Schulz, a professor at the University of Calgary business school, who attended the shareholders’ meeting
“The question is, ‘What is he going to be able to do?’” Schulz said. “On the revenue side, he’s said they will look at and renegotiate customer contracts, but that will take a while. On the cost side, there isn’t much they can do right away because there are union issues.”
The Teamsters Canada Rail Conference, which represents 5,000 conductors, trainmen, yardmen, locomotive engineers and rail traffic controllers and has been in contract talks since early October, plans to strike after May 22 if negotiations with the railroad fail.
Another union leader said it will be crucial for new leadership to improve mid- and lower-level management as well higher ranks.
“Now comes the time of the rebuilding,” said William Brehl, president of the Teamsters Maintenance of Way workers, Canadian Pacific’s second-biggest union. “Hopefully new management of CP Rail, the new CEO and the team he puts together, will go through the whole company layer by layer of management, mid-level and lower level as well.”
Harrison has said in previous interviews that if named CEO, his first task would be to meet with employees and that he prefers to work with the team that’s in place.
Canadian Pacific advanced 0.9 percent to C$76.51 at 4 p.m. in Toronto, adding to the surge in the past seven months as investors speculated Ackman would push the company to make changes.
“It probably won’t make any major moves in the near term,” said Scott Nicholls, a senior analyst with Bishop Rosen & Co. in New York.
If Harrison is named CEO, he has said he can cut Canadian Pacific’s operating expenses to 65 percent of sales in 2015 and that it would take him as long as 18 months to “move the needle.”
“It will take -- assuming they get Hunter Harrison to run the company, I would say three to four years,” to make significant improvements to profits and returns, Nicholls said by telephone. “Harrison did it at Canadian National, but it was done over a period of about five or six years. You don’t make those changes overnight.”
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