William Ackman had to wait only six weeks after winning a proxy fight at Canadian Pacific Railway Ltd. (CP) for his choice as chief executive officer to get the job. Achieving his profitability targets for the least efficient of North America’s major railroads may take several years.
Ackman and the board elected in May are betting that the CEO named today, 67-year-old Hunter Harrison, can pull off a turnaround similar to the one he oversaw at Canadian National Railway Co. (CNR) Harrison has said he can cut operating expenses to 65 percent in 2015 compared with 80.1 percent of sales in the three months through March.
Succeeding will require navigating challenges from labor negotiations to installing the right management team and trimming costs, analysts said, possibly by reducing the workforce and shrinking the railroad’s locomotive fleet.
“For him to get the operating ratio down to 65 percent it’s going to take him four or five years,” said Scott Nicholls, a senior analyst with Bishop, Rosen & Co. in New York. “You just can’t do things overnight. It took Hunter Harrison at Canadian National eight or nine years to get the operating ratio down 10 percentage points.”
If Harrison fails, Ackman may face a backlash from shareholders over his proxy fight to oust former CEO Fred Green and reshape the railroad’s board.
Ackman, whose Pershing Square Capital Management LP became the railroad’s biggest shareholder in October, won election of all seven of his nominees to a 16-member board in May. Green and five previous directors resigned hours before the planned vote, and two more incumbents have left since.
“There are aspirations to shake things up in the short term but that’s not that easy to do,” Robert Schulz, a professor at the University of Calgary business school, said in a telephone interview. “Union contracts have to get settled, otherwise you won’t know what the cost structure looks like going forward.”
Harrison has said that if he became CEO, his first task would be to meet with employees, and that he prefers to work with the team in place.
“I know you, your colleagues and the company have been through unsettling times lately,” Harrison said in a letter to employees. “My immediate focus in the coming weeks will be to get out on the property to meet you and learn as much as I can about the operation.”
The new CEO probably will “evaluate the current people on his management team there and make some changes, bring in his own people and then embark on a plan to turn CP around,” Jason Seidl, a New York-based analyst at Dahlman Rose & Co., said in a telephone interview.
That plan probably will “take a few years, not a few quarters,” Seidl said. “I think he’s going to convey that to the investment community. If anyone can do it, he’s got to be the top of the list.”
One of Harrison’s first tasks is union negotiations. The Teamsters Canada Rail Conference, which represents more than 4,000 engineers, conductors and rail-traffic controllers, went on strike in May after contract talks that began in October stalled over the company’s pension plan.
Canada passed legislation May 31 ordering the Teamsters back to work. The law sent all unresolved issues between Canadian Pacific and the union to binding arbitration, giving the two sides 90 days to settle on a new contract or face one drawn up by the arbitrator.
Harrison will probably “resolve CP’s labor issues, given he has established a level of trust with the various unions over a 10-year relationship,” Benoit Poirier, an analyst at Desjardins Capital Markets in Montreal said in a report today. Of about 16,000 employees “we would not be surprised to see a reduction in the total workforce by 2,000 to 3,000 employees,” Poirier said, adding the job losses would probably occur through attrition.
Harrison is likely to reduce the size of Canadian Pacific’s fleet of about 1,700 locomotives, possibly by 20 percent to 25 percent, Poirier said. The new CEO may remove as many as 34,500 railcars, which “would be a key driver in terms of improving CP’s operating ratio,” he said.
Canadian Pacific gained 1.6 percent to C$74.72 at the close in Toronto. That pushed the stock to a 22 percent advance since Oct. 27, the day before Ackman disclosed Pershing’s stake.
Harrison’s former employer, which cut off his pension and benefits after he became a candidate to lead its smaller competitor, said today it wouldn’t try to block his appointment “at this time.”
Canadian National “is concerned that it will be difficult, if not impossible, for Mr. Harrison to perform his new duties for CP without drawing upon his broad knowledge of CN’s confidential information, which he is not permitted to do,” Mark Hallman, a spokesman, said in a statement.
The railroad has sought court confirmation of its right to terminate benefits and may seek a court injunction later “if it appears that Mr. Harrison is using confidential CN information,” Hallman said.
Ackman has said Canadian National’s litigation over Harrison’s benefits was “frivolous” and that Pershing Square would indemnify him against any losses.
The hedge fund manager sought a management change to boost returns for Canadian Pacific, which had lagged behind its peers on profitability measures since Green took the helm in 2006.
Harrison succeeds interim chief Stephen Tobias, a board member nominated by Ackman and the former operating chief of Norfolk, Virginia-based Norfolk Southern Corp. (NSC:US)
Harrison has “a terrific reputation,” Cameron Doerksen, an analyst at National Bank Financial in Montreal, said in a telephone interview. “He lends a significant amount of credibility to CP’s efforts to improve” its profitability.
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