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Face Off Between Bill Ackman and Canadian Pacific Rail (CP): The Letter Exchange

January 05, 2012 | About:

We reported several times that activist investor Bill Ackman is getting very active with Canadian Pacific Railway Ltd. (NYSE:CP). He is pushing to change the company’s CEO and hire retired Canadian Rail (NYSE:CNI) CEO Hunter Harrison.

Ackman started to buy Canadian Pacific Rail in the third quarter of 2011 when the stock prices were at recent lows. He kept adding to the position as reported in our Real Time Picks. Ackman now owns 24 million shares of the stock, which is more than 14% of the total shares outstanding. Investors certainly see the involvement of Ackman in Canadian Rail as positive as the stock is now traded close to its historical highs.

This is the letter from Canadian Pacific to Bill Ackman:

3 January 2012

Mr. William A. Ackman

Pershing Square Capital Management, L.P.

888 Seventh Avenue

New York, NY 10019

Dear Mr. Ackman:

I have appreciated the dialogue between us and am optimistic that we can continue to discuss how to reach an agreement which advances the best interests of Canadian Pacific. However, on behalf of the Board of Directors of Canadian Pacific I am writing to express concern about recent media reports and to set the record straight regarding assertions attributed to “people familiar with the strategy of Mr. Ackman’s New York hedge fund Pershing Square Capital Management LP.” It is disappointing and highly inappropriate that Pershing Square made inaccurate comments in an article appearing in last Friday’s edition of The Globe and Mail (“CP’s activist investor eyes former CN CEO Hunter Harrison”) and to other media organizations in an effort to advance its own objectives. We are troubled by the inaccuracies and mischaracterizations that have appeared in the media.

Contrary to media reports including Friday’s Globe and Mail article, no member of CP’s Board of Directors has “expressed enthusiasm for Mr. Harrison and requested a meeting with him.” Indeed, no invitation has been extended by us to Mr. Harrison, either directly or via Pershing Square.

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. 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.

We believed that we had established a constructive dialogue with Pershing Square. As part of that dialogue, the Board extended an invitation to you to join the Board, subject to you agreeing to customary arrangements. As you told me, Tony Ingram and Ed Harris are great additions to the Board. Moreover, the appointment of these two directors was met with a very positive reception from shareholders, customers and employees. As a prospective Board member, you would be expected to work constructively with your fellow Board members on the Company’s behalf and in the interest of all shareholders.

CP is focused on maximizing shareholder value through an ongoing commitment to safely delivering excellent customer service and increasing asset velocity, efficiency and productivity. We are executing on our plan, which we believe will deliver an annual operating ratio in the low 70s in the next three years. 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.

Leaks to the media are counterproductive, and we hope that they are not attributable to you personally. With that said, we are willing to continue our dialogue in order to advance the best interests of the Company.


/s/ John Cleghorn

John Cleghorn

Chairman of the Board of Directors

This is the reply from Bill Ackman:

January 3, 2012

Canadian Pacific Railway Ltd.

Gulf Canada Square

401 9 Ave SW – Suite 500

Calgary, AB T2P 4Z4


Dear Mr. Cleghorn:

I write in response to your letter which I received from the press this morning. I too am troubled by inaccurate press reports about Canadian Pacific. To set the record straight, neither I nor any representative of Pershing Square has made any inaccurate statements to the press. Your letter, however, includes a number of statements that should be corrected so that Canadian Pacific’s stakeholders are fully apprised of the facts.

Retired CN CEO Hunter Harrison

Contrary to your statement in the letter that no one at Canadian Pacific expressed an interest in meeting with Mr. Harrison, on the Saturday after our Wednesday, November 2 meeting, you called me at home and asked that I arrange a meeting with him. Neither you nor Canadian Pacific expressed concern about Hunter’s contract with Canadian National at that time. Rather, on that Saturday call and in subsequent communications, it was I who explained to you (and subsequently in communications among our respective counsel) that Hunter was subject to a non-compete agreement which would prohibit him from meeting or speaking with representatives of Canadian Pacific until January 1, 2012.

Contrary to your statement in the letter that we ‘acknowledged’ that we have no plan to improve Canadian Pacific’s operating performance, we do have a plan, and we have made that plan clear both in our initial meeting and in subsequent communications with you. Our plan is to transform Canadian Pacific from the worst performing railroad in North America into one of the best by effectuating a cultural and operational transformation of Canadian Pacific which begins with a new leader.

Hunter has successfully implemented Precision Scheduled Railroading at Canadian National, which has continued to be the best performing North American railroad since his retirement. We believe there is tremendous untapped operating potential at Canadian Pacific, a company with irreplaceable assets and hardworking and highly talented employees. We and, we expect, the vast majority of the company’s employees, shareholders, analysts, and other stakeholders believe that Hunter can realize this potential if given the opportunity to instill a disciplined operating plan and performance-oriented culture with no excuses. 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.

Hunter’s track record, demonstrated first at Illinois Central and then at Canadian National, speaks for itself. One need only read the accurate and glowing press reports which appeared this weekend about his tenure and accomplishments at Canadian National to understand what Hunter’s contribution can be to Canadian Pacific.

Hunter invented Precision Scheduled Railroading and he successfully implemented it at both Illinois Central and Canadian National. He is intimately familiar with Canada’s customers, unions, and relevant regulations. He can hit the ground running and effect the transformation faster, better, and with less risk than any alternative candidate, while incorporating the lessons he has learned from the prior two transformations.

In order for Hunter to be successful, he must have the full support and backing of the board of directors. For this reason, we have asked for two board seats so that we can work with the board and Hunter to effectuate the changes that are required.

While I am greatly appreciative of the company offering me a board seat, I am unwilling to sign what you describe in your letter as “customary arrangements.” The so-called customary arrangement to which you refer is a standstill agreement that no other director of Canadian Pacific has been asked to sign, and which would eliminate many of our basic shareholder rights. As our counsel has previously explained to yours, I am unwilling to sign a standstill arrangement for doing so will neuter my ability to be an effective director.

Among other things, the standstill agreement you proposed requires me to vote all of our shares in favor of each of the board’s nominees for election and vote with the board’s recommendations with respect to any matter proposed by shareholders of the company. In essence, in exchange for one board seat, I am being asked to support the recommendations of a majority of the board and each director’s nomination whether I am in agreement with these recommendations or not. In light of our 14.2% stake in the company and given Canadian Pacific’s substantial underperformance over the last ten years, I am unwilling to tie my hands.

I was also disappointed that the nominating committee was unwilling to meet with our other proposed director despite his flying with me from New York to Calgary on a Sunday night so that we could accommodate the board’s schedule. The committee’s unwillingness to even meet our proposed candidate further emphasized the importance to me of the need to have more than one Pershing Square representative on the board.

Fortunately, there are a number of statements in your letter with which I agree wholeheartedly. With respect to Tony Ingram and Ed Harris, we are supportive of their addition to the board as they both bring valuable railroad industry expertise.

I am also in agreement that our dialogue to date has been constructive. In order to make further progress, I would like to arrange a meeting with Hunter Harrison and our other proposed director candidate so that the board can evaluate Hunter and our second director’s candidacy. Hunter and we will make ourselves available at the time and place of your choosing. We ask that such a meeting take place as soon as practicable. I can’t imagine there is anything more important and time sensitive for this board to consider.

I look forward to hearing from you.

Pershing Square Capital Management, L.P.


/s/William A. Ackman

William A. Ackman

Chief Executive Officer

Canadian Pacific will release its fourth-quarter financial and operating results at 7:30 a.m. Eastern time (5:30 a.m. Mountain time) on January 26, 2012.

CP will discuss its results with analysts in a conference call beginning at 11:00 a.m. Eastern time (9:00 a.m. Mountain time) on January 26, 2012.

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 2.3/5 (13 votes)


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