A Canadian Pacific Railway locomotive pulls a train in Calgary, Alberta, Canada on Monday, March 22, 2021.
Alex Ramadan | Bloomberg | Getty Images
Company: Canadian Pacific (CP)
Business: Canadian Pacific owns and operates a transcontinental freight railroad in Canada and the United States. The company transports bulk cargo, including grain, coal, potash, fertilizers and sulfur. It also carries commodities such as energy, chemicals and plastics, metals, minerals, and consumer, automotive, and forest products. In addition, Canadian Pacific also operates intermodal shipments involving retail merchandise in overseas containers. The company offers rail and intermodal transportation through a network of approximately 13,000 miles serving business centers in Quebec and British Columbia, Canada; and regions of the Northeast and Midwest of the United States. Through the merger with Kansas City Southern, Canadian Pacific will now gain access to Mexico, creating the first single track rail network to connect the US, Mexico and Canada.
stock market value: $72.3 billion ($77.63 per share)
Activist: Pershing Square
Percentage Ownership: 1.59%
Average cost: n/a
Activist comment: Pershing Square, run by Bill Ackman, is a highly respected and successful activist. While the firm does not take many activist stances compared to other activists, the positions it takes tend to be broad, well thought out, and fully committed. Pershing Square is generally looking for the following: (i) a high quality business, (ii) a simple, predictable, cash flow generating, sustainable growth concept, and (iii) a business that has the potential to be a catalyst. Pershing Square previously ran a highly publicized activist campaign in the Canadian Pacific between 2011 and 2016, generating a return of 153.30% for their 13D situation compared to 70.13% for the S&P 500.
What is happening?
Behind the scenes
Pershing Square previously submitted 13D’s bid to Canadian Pacific on October 28, 2011, and it has become one of the most successful and significant activist campaigns in the past 20 years. An advocacy campaign has three main elements: (i) developing a plan to create value, (ii) getting the opportunity to implement that plan, and (iii) successfully executing that plan. Pershing Square was impressive in every way. They devised a plan to replace the CEO with Hunter Harrison, the “Michael Jordan” of the railroad executives. They fought a long and hard proxy fight with a very high degree of difficulty at the time and ended up replacing most of the board. In addition, the execution of the plan went either as expected or better than expected, creating significant shareholder value. Pershing Square reluctantly exited this investment with a 153% return in 2016, with shares trading at $27.28 per share (split-adjusted) due to multiple buyout requests related to other Pershing Square investments.
Their fingerprints are all over the company. Since then, they have been watching Canadian Pacific for a good entry point for investment, but have never found it, as the company’s stock has risen almost immediately since then. Now the opportunity presented itself in the form of a merger between Canadian Pacific and Kansas City Southern. Although the acquisition has been completed, the merger is still subject to final approval by the Ground Transportation Board, which is expected to be received by the fourth quarter of 2022.
On a standalone basis, the Canadian Pacific is doing very well, with Hunter Harrison’s ward Keith Creel at the helm after Harrison’s departure. Creel has done and continues to do an amazing job of growing the company and running it effectively. The merger of Canadian Pacific with KCS will create a single railroad between Mexico, the US and Canada and create opportunities for revenue growth and efficiency gains. In terms of efficiency, Creel can apply the same discipline that he and Hunter Harrison used at CP to streamline KCS operations.
But the best opportunity is on the income side. Most importantly, having a single railroad that can get goods from Canada to Mexico efficiently is a huge advantage in attracting customers. But there are several other tailwinds that have been highlighted and reinforced by the current war in Ukraine. First, the United States is making efforts to improve its infrastructure, which should lead to an increase in the volume of goods moving around the country. Second, with historically high gas levels, companies will look for the cheapest way to ship their goods. Third, North American companies are already losing the will to rely on China as a distribution partner and are looking to keep their supply chain closer to home. The war in Ukraine and the possibility of a Chinese offensive against Taiwan in the future have greatly increased this concern.
In addition, there is an ESG advantage here, since railways are an energy efficient way to transport goods. Using 50 railroad cars to deliver food from California to Ohio instead of trucks would take 126 trucks off the road and prevent 391.5 tons of carbon dioxide from being released into the atmosphere if trucks were used, according to the American Railroad Association.
We expect Canadian Pacific 2.0 to be very different from the first time. Bill Ackman likes this CEO. In fact, he is somewhat responsible for being there. It will be very amicable, and if Pershing Square takes a seat on the board of directors here, it will be to support management as a long-term investor in a major investment for them. When you have the best management team in the industry, you want to add assets and income to it. This is exactly what Pershing Square sees in Canadian Pacific.
Ken Squire is the founder and president of 13D Monitor, an institutional research service for shareholder activity, and the founder and portfolio manager of 13D Activist Fund, a mutual fund that invests in the 13D activist investment portfolio.