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Portfolio Update
Canadian Pacific Railway Ltd. (CP)
On May 17th, all seven of the Nominees for Management Change including Paul Hilal and myself were elected to the board of CP each with support from 85% to 94% of the shareholders. The six CP directors who received the fewest votes, including CP’s Chairman and CEO Fred Green, resigned from the board the night before the annual meeting.
As a result of the election, we have received an overwhelming mandate for management change at CP. The new board is working diligently to identify a new CEO for the company, while Steve Tobias, a Pershing Square nominee and former Executive Vice Chairman of Norfolk Southern, serves as interim CEO. In light of the limited number of potential railroad CEO candidates, we do not expect a lengthy search process. During the contest, we proposed legendary railroader Hunter Harrison as CEO, but committed that the new board would also consider other candidates for the role.
On June 4th, the board elected Paul Haggis as its new chairman. We recruited Paul to our board slate because he brings valuable turnaround and board expertise as well as strong relationships in the Canadian business and government communities.
Because CP’s business issues are almost entirely operational in nature – the railroad’s operating margins are half that of its Canadian competitor due to its inefficient asset utilization and productivity – this turnaround is substantially less risky than one predicated on increasing revenue growth. CP’s business will, however, be somewhat impacted by global macro conditions. In assessing the profit potential of this investment, we have used conservative assumptions about the global economic environment. Even in a weak economic environment, we expect the potential for operating profit enhancements to greatly exceed the impact of macro headwinds on the value of the business.
The significance of our landslide victory at CP has not gone unnoticed in board rooms in Canada and in the United States. In CP, an activist shareholder from the U.S. received overwhelming shareholder support from Canadian and U.S. shareholders in a contest against a high profile board of a large cap iconic Canadian company. Our success at CP demonstrates that no underperforming company can resist needed change when it is proposed by a credible long-term investor
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