Friday, April 27, 2012

CP vs. Pershing Square: Here we go again!

Written by  Lawrence H Kaufman

Reaction to the fight for control of Canadian Pacific seems to depend on whether the person reacting is a railfan or an investor.

For railfans, the battle between the current CP board of directors and American Bill Ackman and his Pershing Square Management hedge fund is the biggest thing since Norfolk Southern and CSX battled over Conrail 15 years ago. Whether it is blogs like this one, major rail-focused publications, or more obscure publications that cover the trade, it easily is the biggest topic for discussion.

For investors, on the other hand, it’s hard to find much in the business media. CP stockholders are hearing from the two contending forces, but for the public, it’s just not that big a deal.

A big deal for railfans but not for investors? How could that be? Actually, it’s not hard to explain at all. The two groups have different interests and different criteria.

Ackman, the insurgent, believes CP has not been well-managed by the current board and chief executive. He has acquired 14% of CP stock and wants to replace nearly half the CP board of directors, and CEO Fred Green.

CP recognizes Ackman’s stake in the railroad and has offered him a seat on the board, but basically is trying to persuade CP stockholders that it is on the right track (no pun intended) and that nothing needs to be changed. Stockholders get their chance to decide at a May 17 stockholder meeting.

For railfans, this is a titanic battle. For investors, it is just the dispute of the day. They are used to these things and don’t appear overly excited by the fight for control of Canada’s second-largest rail system.

Railfans argue both sides, and some have resorted to demonizing Hunter Harrison, the hard-nosed retired CEO of Canadian National Ackman has recruited to replace Green.

What the railfans fail to recognize is that for those who hold large stock positions in CP it’s all about the money. Pension trusts, mutual funds, insurance companies, and other institutional investors don’t give a rip about rail operations or who is the nastier or less nasty of those battling for control.

To institutional investors, CP is just another holding. No emotion. They’ve watched CP stock go up sharply since the control battle began. Now they are considering what is likely to happen after stockholders cast their votes. Many expect the price of CP to drop regardless of which side wins.

It would not be at all surprising if we were to learn that many holders have sold CP and now have either a small position or none at all. Who would buy CP now, after its large run-up and with the prospect that it might soon drop? Abitrageurs, that’s who. Arbs, as they are known, frequently bail out institutions looking to sell and take the risk that the stock might not drop precipitately. That’s why they are called arbs.

Back when Norfolk Southern and CSX fought over Conrail, it turned out that institutional investors had sold and effective control of Conrail had passed into the hands of arbs in the weeks before the Contrail stockholders voted on the CSX offer to buy the entire company.

NS CEO David Goode managed to secure the loyalty of the arbs by publicly stating that NS would not participate in any transaction that did not give all Conrail stockholders $110 a share in cash. The CSX offer was a combination of cash and stock. Preferring cash, arbs voted down the offer on the table and the $110 a share price held when NS and CSX eventually decided to jointly acquire Conrail and divide it between them.

The battle over CP is not likely to end the way the fight for Conrail did. For one thing, there is no deal driving the value of CP stock. CP might be worth more if it is managed by a proven aggressive management, but it is unlikely to hold in the mid-70s once the management war is ended.