Canadian Pacific in the cross-hairs

Posted by Fred Frailey
on Wednesday, November 2, 2011

In my former life, I put out an 800,000-circulation magazine about ordinary Janes and Joes and their money. And one person my writers focused on for great investment ideas was Bill Ackman, the 45-year-old investor who runs a $6.3 billion hedge fund called Pershing Square Capital Management. At investor conferences I attended, Ackman strode about the stage like a rock star. Individual investors paid $1,000 or more just to listen to Ackman. He had a track record of finding companies whose stocks were undervalued and then putting the squeeze on management to do what had to be done to make those prices reflect the real values. More often than not, he succeeded.

Now Bill Ackman’s laser-like focus has settled on Canadian Pacific, the one big North American railroad still trying to convince the world that it has its act together. The other day Pershing Square revealed in a filing with securities regulators that it owns or controls 12 percent of Canadian Pacific shares. This is the corporate equivalent of an act of war.

In most instances, Ackman’s strategy is to amass a formidable stake and then go to management with a plan to get the stock price out of the doldrums. He doesn’t take no for a final answer, either. Reading the news, I searched my mind for such a plan. Invest heavily in the Bakken Shale oil fields of North Dakota and Saskatchewan? Happening now! Invest even more to extend its Minnesota Dakota & Eastern subsidiary into the Powder River Basin coal fields? I don’t think spending big bucks is what Ackman has in mind.

So what is Ackman up to? Maybe his is simply a passive investment, a la Warren Buffett’s initial foray into Burlington Northern Santa Fe, in a railroad with great long-term potential. But that is contradicted by Ackman’s request for a meeting with management and CP directors. Talks between the parties may already have begun, in fact. There is an agenda here, except that you and I don’t yet know what it is. Does he want CP to be sold? One railroad analyst suggests that BNSF Railway is in the wings, but further railroad consolidation now would be difficult, perhaps impossible, to pull of politically. What about a change at the top? That’s what Ackman engineered at JC Penney, by luring the man in charge of Apple’s retail network to become the new chief executive.

The latest event must be disconcerting to Fred Green, Canadian Pacific’s chief executive and a CP lifer. His company just went through a century-worst winter on the Canadian prairies that saw its operating ratio skyrocket, its stock price tank, and its intermodal market share versus Canadian National take a turn for the worse. There is now, in fact, almost a 20-point gap between the operating ratios of CP and CN. Then came floods that closed its crowded main line into the U.S. from North Dakota to Chicago. Rightly or wrongly, Canadian Pacific remains the railroad everyone loves to hate. And now this. — Fred W. Frailey

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