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What's next for Canadian Pacific?

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Brady Yauch, BNN.ca staff 

The six-month proxy battle between Bill Ackman's New-York based hedge fund Pershing Square and Canadian Pacific Railway (CP-T), one of the country's oldest companies, is complete -- with the hedge fund successfully forcing CEO Fred Green to resign and overhauling its board.

By mid-afternoon on Thursday, CP named newly-elected board member and 40-year railroad industry veteran Stephen Tobias as its interim chief. CP says its board has appointed a search committee to find a permanent CEO.

CP also named Madeleine Paquin as acting chair.

"The Board of Directors of Canadian Pacific is united in its commitment to serving the best interests of this great Company. We are confident in the depth and breadth of this Board and its ability to work with the management and all CP employees to serve our customers and communities. We are looking forward to working together to build value for our shareholders," the railway said in a statement.

Former CEO Fred Green's departure came just hours before Thursday's proxy vote in Calgary, which was expected to result in a new slate of dissident board members. Joining Green in exit was high-profile chairman John Cleghorn and four other board members: Tim Faithfull, Edmond Harris, Michael Phelps and Roger Phillips.

Speaking at the meeting, Ackman said he was “humbled” and “honoured” by the support he received from shareholders and felt that he was treated like “brethren” by Canadians.

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Green, a lifetime CP Rail employee who had been with the company for 34 years and who assumed the CEO role in 2006, fought against Ackman’s claim that he could improve operations, but lost the backing of some major shareholders in recent months, including Canadian Pension Plan Investment Board, the Ontario Teachers Pension Plan and a number of proxy advisory firms.

"The Board wishes to thank Fred [Green] for his dedicated years of service," John Cleghorn said in the statement announcing the resignation.

The railway says all seven directors put forth by Pershing Square have been elected and will take their seats on the 16-member board. Those new board members are: William Ackman, Gary Colter, Paul Haggis, Paul Hilal, Rebecca MacDonald, Anthony Melman and Stephen Tobias.

Pershing Square acquired a 14.2-percent stake in the company last fall. Disputes between the hedge fund and management on how to lower its operating ratio -- a measure of efficiency, with a lower number preferred -- from its industry high of near 80 percent prompted the proxy battle to oust CEO Fred Green and overhaul the board.

Ackman proposed to replace Green with former Canadian National Railway CEO Hunter Harrison, who helped turn CN into an industry leader. Harrison is widely expected to assume the CEO role with the resignation of Green -- though Harrison was not in attendance at the meeting and Ackman told reporters that a full CEO search will be undertaken.

“I’m surprised that we didn’t wait to see what the actual results [from the proxy battle] would be,” Tony Hatch, ABH Consulting tells BNN. “We expected to see results and then maybe a series of press releases and announcements…we now need to wait to see what the board is going to do, but the assumption is that we’ll see the return of Hunter Harrison.”

CP Rail shares jumped more than 2 percent after news of the boardroom overhaul broke.

PRECISION RAILROADING

Ackman has repeatedly said Harrison is the right person to run the railway. At Canadian National, Harrison made changes he had honed at U.S. railway Illinois Central. CN calls Harrison's system "precision railroading," and can be a tad ambiguous about what it means. But the most important point is simple: make sure the trains run on time.

Traditionally, railways had played fast and loose with schedules, holding trains until they were hauling as much cargo as possible. From the perspective of single trains, flexibility can seem efficient, but that misses the big picture. Locomotives don't get where they are needed; crews are idle; cargo is late.

"CN has led the industry with being more disciplined, more scheduled. That might result in smaller trains on occasion, but you get much better asset utilization," University of Dayton professor and railway consultant Michael Gorman said earlier this year.

Under Harrison, CN Rail started moving assets more quickly, shipping more cargo using less equipment. It cracked down on shifts that traditionally started late and ended early, a tough regime that at one point brought two strikes in four years.

When Harrison arrived in 1998, CN's operating ratio, a key measure of railroad performance, was 75.1. When he became CEO in 2003, the ratio had fallen to 69.8 percent, for several years before the financial crisis it came in below 65.

CP's operating ratio has lagged CN since the mid-1990s. In the first quarter, CP's operating ratio was 80.1 percent, while CN's was 66.2 percent.

WILL CEO CHANGE MAKE A DIFFERENCE?

Analysts say installing a new CEO and chairman is the first step in turning the struggling railroad around and ending the uncertainty that has plagued it in recent months.

“Ultimately this is a solid positive to see capitulation and is a signal that the new board will likely work together in a constructive manner to improve the company,” Christian Wetherbee from Citi Investment Research and Analysis tells BNN.

Wetherbee says he expects the new chairman of the board will be one of Pershing’s candidates, likely a Canadian.

But, Canaccord Genuity’s David Tyerman warns that while the long-term outlook for CP Rail remains attractive, the major change in the company’s management may complicate matters in the short term.

“CP has strong operating momentum, which should help maintain good EPS [earnings per share] improvement momentum, but there is risk from the introduction of a new CEO (and quite possibly other senior executives),” he said in a note to clients. “Harrison does not know the CP property and it will likely take him time to assess the situation, develop a game plan and execute the plan. Harrison has already said he thinks it will take at least 12-18 months to move the needle with his strategy, which at this point appears to boil down to culture change.”

CP Rail was originally founded 1885 to link the country’s two coasts and has in recent decades transformed itself by selling off hotel, coal and shipping operations.

With files from Reuters

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