Monday, April 23, 2012

CP: Pershing Square has “no plan and no ideas”

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Following Canadian Pacific’s favorable first-quarter 2012 earnings report last week, Pershing Square Capital Management stepped up its attack on CP President and CEO Fred Green (pictured) and his management team with a strongly worded letter to shareholders that some industry observers are calling an obviously self-serving and misleading manipulation of numbers.

Said Pershing Square, “CP's negative 18% total return to shareholders during CEO Fred Green's tenure reflects its position as the worst managed and poorest performing Class I railway. The cost to shareholders of CP's poor board oversight and mismanagement has been enormous. If you invested $10,000 in Canadian Pacific when Mr. Green became CEO, you would have lost $1,800 and be left with only $8,200 (including dividends) as of the day prior to Pershing Square's investment in CP. Alternatively, if you invested $10,000 in a portfolio of the other Class I railways over the same period, you would have $15,900 , nearly twice as much. . . . [T]he current board and Mr. Green again ask shareholders to believe that sustainable progress is just around the corner. Unfortunately, the first quarter's results serve only to remind us of why we shouldn’t. After six years of promises and ‘detailed plans,’ the company’s performance is worse than it was in the comparable quarter in 2006, just prior to Mr. Green becoming CEO, despite the benefit of a strong tailwind from this year’s record mild winter. . . .

“The Board and Mr. Green attempt to divert shareholders' attention from the company’s poor financial performance to ‘improvements’ in non-GAAP, non-financial operating metrics. These metrics are distorted by the material benefit of a record mild winter and the outsized capital and operating expenditures of the company's wasteful 2012 Winter Plan . Such expenditures destroy value and harm shareholders, but they can make selected operating metrics look better. . . . The incumbent board and management have failed shareholders, employees and customers. Their failed stewardship of CP and indifference to concerned shareholders make it clear that nothing less than a fundamental board restructuring and a new CEO will put CP back on track.”

Countered CP: “When faced with incontrovertible proof of CP’s strong operating and financial performance, Pershing Square continues to distort the record to distract shareholders from the fact that it has no plan and no ideas. CP is building on its significant momentum and continuing to achieve record operating metrics, which are resulting in improved financial results and creating enhanced shareholder value. CP is confident that the continued successful execution of the Multi-Year Plan by the CP management team will help drive further financial improvement, further operating ratio improvement, and further shareholder value creation.

“CP’s Board is unanimous in its belief that Pershing Square’s demand that it replace the Company’s CEO with Hunter Harrison would delay and damage CP’s value-generating plan, and represents unwarranted risk to shareholder value at a critical time. Mr. Ackman and Mr. Harrison have publicly conceded that neither Pershing Square nor Mr. Harrison have any plan for reducing CP’s operating ratio. Mr. Harrison has admitted if he were installed as President and CEO that it would take him some 18 months to get his team in place, develop a plan and begin to ‘move the needle.’ Despite much rhetoric, Pershing Square still has no plan. “

Said one observer, “Pershing Square’s reliance on spouting lots of numbers reminds me of that old saw about the Skid Row bum leaning against a lamp post. He’s using that lamp post for support—not for illumination.”

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