by Jay Nordenstrom, TalkRail.ca
Is it worth risking an irreplaceable national transportation system for a questionable promise of a couple of extra pieces of silver?
That’s what Canadian Pacific shareholders need to ponder before voting at the railway’s annual meeting in Calgary on May 17. Their dilemma results from a messy proxy battle launched by Pershing Square Capital Management, a New York hedge fund with ownership stakes in retailers J.C. Penney and Target, as well as McDonald’s and Wendy’s.Pershing Square’s CEO, Bill Ackman, wants shareholders to give him the power to drastically revise CP’s board of directors, its management and their way of running what is already a profitable transcontinental railway. He wants to replace current CP president Fred Green with former CN president Hunter Harrison, who would return from retirement in the U.S. CP profits and dividends would allegedly increase rapidly thanks to a new corporate culture that would include large reductions in locomotives, freight cars and employees.
On the other side of this dust-up is the current CP board. It is headed by former Royal Bank of Canada chairman and CEO John Cleghorn and includes two bright lights recently brought aboard from the U.S. rail industry, one of whom was Harrison’s operations chief at CN. These heavyweights and an outside rail analyst hired by the CP board endorse the current multi-year growth plan, which was presented to investors in Toronto on March 27. The plan hinges on steady increases in traffic, revenues and profits, as well as cost control.
Pershing Square’s argument rests on its view that CP has not been performing as well as CN of late. There is some truth in this, but there are also extenuating factors that are being addressed by CP now. A new management team totally unfamiliar with CP is unlikely to fix these glitches and miraculously unlock hidden value in something as complex, capital intensive and physically challenging as a 23,700-kilometre, continent-wide railway. It’s like expecting a supersized steamship to pull a 90-degree turn mid-ocean.
The reality of railroading is that no two railroads are alike. Nor should they be expected to perform identically. CP and CN handle different mixes of freight traffic, take different routes (even between the same cities) and grapple with different topographical and climatic conditions. These factors can severely affect performance year-to-year.
The two railways also have widely variant funding histories. From 1919 to 1995, CN was a Crown corporation that enjoyed extensive public support. This left a plush infrastructure legacy that continues to have a positive effect on its performance as a privatized railway.
As an investor-owned company throughout its 131-year history, CP has always had to run hard to meet the challenges posed by CN, some large U.S. railways that cross the border and other forms of indirectly subsidized transportation, such as trucking. These challenges have been met and dividends have been paid consistently.
If this CP approach is so flawed, why has CN’s current president been adopting some of the technologies and customer-friendly service techniques CP has pioneered and employed for many years?
CP shareholders also need to consider the views of major freight shippers, who have a huge stake in the future of a nation-spanning railway that helps support Canada’s economy, its global competitiveness and thousands of jobs on and beyond its rails. Among those in favour of the CP team’s growth plan are the senior executives of mining giant Teck Resources, Paterson Global Foods, Consolidated FastFrate and Mosaic, the world’s leading producer of potash and concentrated phosphate.
It’s worth recalling the track record of others who promised untold riches if investors just put certain railways in their hands. As the fourth generation of my family to work in and around the rail industry, I had a ringside seat for the fallout from misguided decisions to install these prophets of profit at the helm of several U.S. railways. The result was asset stripping, service cuts, line abandonments, employee layoffs, insolvency and government intervention.
Do unsubstantiated claims of ever-increasing CP dividends make Pershing Square’s bid a risk worth taking? Tampering with the railway long known as our national dream could be dangerous for investors, shippers, employees and the public. It risks turning CP into a national nightmare. That’s no way to run a railway.
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