‘Ottawa’ Canadian Pacific Railway Ltd is a Win For Bill Ackman, No Matter How You Keep Track
When activist investor Bill Ackman first approached Canadian Pacific Railway Ltd.’s management about making major changes to the underperforming railway, including hiring a chief executive who had just retired from its closest rival, they were understandably defensive.
In press release on Feb. 6, 2012, responding to a town hall meeting Ackman’s hedge fund had just held for CP shareholders, the company accused Ackman of having no plan, just criticism.
“Pershing Square continues to offer no plan or clear timetable to improve CP’s operations, or even any concrete suggestions,” the release said. “Pershing Square made a number of assertions and characterizations supported by hypothetical mathematical examples of the effects of speculated improvements on operating metrics.… Pershing Square has no plan and has provided no specific actions to support its hypothetical math.”
As it turns out, Ackman did have a plan. And for the company and its shareholders, the math has worked out pretty well.
CP announced Wednesday that Pershing Square would sell its remaining shares in the company, reducing to zero a stake that once stood at 14.4 per cent.
The railway’s stock price has more than tripled since 2011, when Ackman first bought in.
While Ackman’s recent track record as an activist investor has not been stellar — high-profile bets on Valeant Pharmaceuticals International Inc. and against Herbalife Ltd. have soured and his fund, Pershing Square Holdings, is down 19 per cent so far this year — there is one victory that he can declare unequivocally: his investment in CP.
And his success there goes beyond making money. Ackman can also take credit for helping transform CP operationally, culturally and financially with the help of his hand-picked CEO, Hunter Harrison, the former CEO of Canadian National Railway Co.
“Canadian Pacific has completed an incredible transformation since our initial investment,” Ackman said in a statement Wednesday. “Hunter Harrison and (chief operating officer) Keith Creel have restored to greatness one of North America’s top railroads and have set the company on the path to continued success.”
When Ackman first brought Harrison on board, he promised that he would bring CP’s operating ratio down from 90.6% in 2011 to the mid-60s by 2016, prompting disbelief from analysts who bought the former management team’s line that it couldn’t be done.
You have to ask what were their original goals, and they accomplished those
Ackman eventually prevailed, winning over CP’s shareholders through a proxy battle that elicited much hand-wringing about how corporate Canada was under siege from American activist investors.
CEO Fred Green, chairman John Cleghorn and four other directors agreed not to stand for re-election at the annual meeting in May 2012, clearing the way for Ackman to appoint his own board members, including himself, and bring in Harrison as CEO.
In the end, Harrison exceeded even his own expectations, achieving his goal by 2014 and then lowering it even further into the 50s by the third quarter of last year. In the most recent quarter, which was hit by an industry-wide slowdown in freight volumes, CP reported net income of $328 million, revenue of $1.45 billion and an operating ratio of 62 per cent.
Arguably, Ackman’s only failure at CP came when he joined forces with Harrison to make the case for industry consolidation. After a failed attempt to buy Florida-based CSX Corp. in 2014, Harrison set his sights on Virginia-based Norfolk Southern Corp. last year.
Ackman joined the company’s conference calls as it repeatedly made the case to shareholders and analysts that consolidation was not only desirable but necessary, but was eventually forced to walk away after months of opposition.
However, Ackman’s track record at CP is still an indisputable success, said Tony Hatch, principal at railway consulting firm ABH Consulting.
“He didn’t go into this with the idea of merging and consolidating the industry, he went into it with the idea that this was an underperforming railroad that needed a management change,” Hatch said in an interview. “You have to ask what were their original goals, and they accomplished those.”
CP’s shares fell 3.06 per cent Thursday on news of the share sale, closing at $186.60.
RBC analyst Walter Spracklin said the decline should be short-lived.
“With expectations that the remaining block would be sold, there was an element of ‘overhang’ associated with the block,” Spracklin wrote in a note to clients. “Accordingly, we see completion of the offering as a positive from a sentiment standpoint on the shares.”
Hatch said Pershing Square’s decision to exit CP makes sense at this stage given that the railway’s growth is likely to be “more incremental” in the future.
“It may be a sign that the low-hanging fruit might have been plucked but I don’t think it’s a sign at all that the story is over in any way,” Hatch said.
Ackman said he’ll stay on as a CP director until the next annual meeting, which Harrison also plans to make his last before he heads back into retirement.
It feels like the end of an era for the railway, but analysts expect the company to hold steady under the guidance of Creel, who has been tapped to succeed Harrison as CEO on July 1, 2017.