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New York shareholder activist Bill Ackman and the board of Canadian Pacific Railway Ltd. (CP-T) are trading pot shots over who should lead the historic company to a new future.
Responding to a public rebuke from CP chairman John Cleghorn over Ackman's pressure to hire Hunter Harrison as the railway's new chief executive officer, the activist called for the resignation of the current CP CEO, Fred Green.
"We believe it is the senior-most leadership of the company that must be changed, namely Fred Green, in order for this potential to be unlocked," Ackman said in a letter released Tuesday.
His letter also took aim at Cleghorn for denying media reports that some CP directors had expressed interest in Harrison as a potential CEO candidate.
"Contrary to your statement in the letter than no one at Canadian Pacific expressed an interest in meeting with Mr. Harrison . . . you called me at home and asked that I arrange a meeting with him," Ackman said.
Ackman's letter followed a public rebuke earlier Tuesday from CP's board of directors that criticized the activist for pressing the freight carrier to hire Harrison as its new CEO.
Cleghorn stated the board of directors' concerns in a letter to Ackman, CEO of Pershing Square Capital Management LP. Mr. Harrison served as Canadian National Railway Co.'s (CNR-T) CEO from 2003 to 2009.
The letter filed with the U.S. Securities and Exchange Commission marks the first sign of discord between CP and Ackman since his New York hedge fund began accumulating last September what is now a 14.2-percent stake in the Calgary-based company.
"When Pershing Square put forward Mr. Harrison's name as part of its presentation to the company, CP expressed concern regarding Mr. Harrison's contract with Canadian National Railway and his ability to engage with CP due to his non-compete arrangements," Cleghorn said. "Further, you made assertions in your presentation and our subsequent discussions regarding possible improvement in CP's operating performance but you acknowledged you did not have a plan either as formulated by Mr. Harrison or Pershing Square."
Cleghorn said CP directors have invited Ackman to join the board, but he denied that any CP director has indicated interest in courting Harrison either directly or through Pershing Square. "It is disappointing and highly inappropriate that Pershing Square made inaccurate comments" to the media "in an effort to advance its own objectives," Mr. Cleghorn wrote.
Ackman has declined the offer of a board seat because the railway requested that he sign a standstill agreement before accepting the appointment. Standstills typically restrict investors from acquiring additional shares or launching hostile actions, such as a proxy battle to replace company directors.
Green, who has served as CP CEO since 2006, has been seeking to improve CP's operating ratio, a key indicator of productivity that measures operating costs as a percentage of revenue. CP's operating ratio ranks as the worst among North America's Big Six railways. A lower ratio is better, and CP's was 82.4 percent in the first nine months of this year, compared with CN's industry-leading 63.1 percent.
"We are executing on our plan, which we believe will deliver an annual operating ratio in the low 70s in the next three years," Cleghorn said, referring to CP's strategy to become more efficient by operating longer and faster trains with new locomotives, and upgrading tracks.
While the letter didn't refer to Green, Cleghorn emphasized that "CP has a strong management team and an independent board made up of directors with extensive experience in railroads, energy, natural resources, food and agriculture, law, government, banking and finance."
Harrison, 67, retired from CN at the end of 2009. He had a non-compete clause that expired at the end of 2011, so he is now able to accept a job that entails competing against CN, if he so chooses.
"Mr. Harrison comes with a massive pedigree and would be a fantastic addition, but I don't know if he's the right guy for the CP team," said Raymond James Ltd. analyst Steve Hansen, who characterized Cleghorn's letter as the start of CP's campaign to push back against Ackman and Pershing Square, which is CP's largest shareholder. "The letter is a shot across the bow."
Even if Harrison doesn't join CP, "management change is forthcoming at CP. The question is to what degree is change coming and over what time period," Hansen said. "A lot of shareholders would agree that some change in management would be a good thing for CP."