A CP grain train near Lake Louise, Alta.The Canadian Press
An activist hedge fund from New York is taking aim at Canadian Pacific Railway Ltd., seeking to turn around a company that has struggled this year.
Pershing Square Capital Management LP said in a regulatory filing late Friday that it now owns 12.2 per cent of the venerable Canadian railway and that it plans to approach CP's management and board for talks about "the business, management, operations, assets, capitalization, financial condition, governance, strategy and future plans of the issuer."
Filings with the U.S. Securities and Exchange Commission by Pershing show that the hedge fund manager has accumulated about 18 million shares in the railway and options to acquire another 2.65 million. Pershing started buying CP shares in September, when the stock fell to a 52-week low.
The move comes as CP faces challenges to turn around its operations after a rough start to 2011. CP suffered through brutal winter weather in the Rockies in the first quarter, notably avalanches that disrupted freight shipments in Western Canada. Then flooding in Saskatchewan, Manitoba and North Dakota threw the second quarter off track.
Calgary-based CP, Canada's second-largest railway, declined comment Friday. Its stock price surged late in the trading day and closed up nearly 8 per cent in Toronto to $66.30.
CP has been criticized by some industry observers for failing to streamline operations, especially compared with the country's No. 1 freight carrier, Canadian National Railway Co. While CN's shares went up nearly 50 per cent in the five years ended Sept. 30, CP's declined 9 per cent, excluding dividends.
Reached Friday night in New York, Pershing chief executive officer William Ackman declined to answer questions about investment plans. "Not yet," he said.
Mr. Ackman has earned a reputation and a large personal fortune by placing big bets on underperforming or flawed companies, often in the retail sector, where he has in the past taken an interest in Sears Canada and Canadian Tire Corp., among others. He was also one of the first investors to anticipate the collapse of mortgage-backed securities in the United States. His successful bets against mortgage-backed securities and unheeded warnings to regulators earned him a cameo in the Oscar-winning documentary Inside Job.
Unlike other activist investors who buy large stakes in corporate laggards to put them in potential takeover play, Mr. Ackman is known for working with corporate boards and executives to urge them to improve performance by shaking up management or divesting assets.
People familiar with Pershing said the fund has not yet had any conversations with Canadian Pacific management. It is expected that Mr. Ackman will present the company with a number of concerns and proposals for improving everything from the company's lagging train speeds to its slim profit margins.
Typically, Mr. Ackman's investments are followed by months of internal discussions and negotiations with company management or directors. His criticisms of Wendy's International Inc. eventually prompted the company to sell its Tim Hortons subsidiary through an IPO. More recently, Pershing convinced Apple Inc. retail head Ron Johnson to take a new post as chief executive officer of J.C. Penney Co., a struggling department store chain in which the fund acquired a 16-per-cent stake in October, 2010.
Earlier this week, CP announced that it posted a third-quarter profit of $186.8-million, down 5 per cent from $197.3-million in the same period last year. Its share profit fell short of analysts' expectations, dipping to $1.10 from $1.17.
CP's third-quarter operating ratio, a key indicator of productivity that measures operating costs as a percentage of revenue, rang in at 75.8 per cent. A lower operating ratio is better, and CP's ratio worsened from 73.7 per cent in the third quarter of 2010. Montreal-based CN's operating ratio improved to 59.3 per cent from 60.7 per cent.