Ackman’s Pershing Square is back in Canada Pacific. Here’s what’s ahead

Canada’s Pacific Railroad locomotive pulls a train in Calgary, Alberta, Canada, on Monday, March 22, 2021.

Alex Ramadan | Bloomberg | beautiful pictures

Company: Canadian Pacific (CP)

Business: Canadian Pacific owns and operates a transcontinental freight railway in Canada and the United States. The company transports bulk cargo, including grain, coal, potash, fertilizer, and sulfur. It also transports goods, such as energy, chemicals and plastics, metals, minerals and consumer goods, automobiles and forest products. Furthermore, Canadian Pacific also transports intermodal traffic including retail goods in overseas containers. The company provides rail and intermodal transportation services through a network of approximately 13,000 miles serving business centers in Quebec and British Columbia, Canada; and the Northeast and Midwest regions of the United States. Through it merged with Kansas City SouthernCanadian Pacific will now have access to Mexico, creating the first single-track rail network connecting the US, Mexico and Canada.

Stock market value: $72.3 billion ($77.63 per share)

Activist: Pershing . Square

Ownership rate: 1.59%

Average costs: n / a

Activist comments: Pershing Square, managed by Bill Ackman, is a highly respected and successful activist. Although the company doesn’t take on as many activist positions compared to other activists, the positions it fills are generally large, well-formed, and fully committed. Pershing Square is typically looking for the following: (i) a high-quality business, (ii) a simple, predictable, sustainable growth concept that generates cash flow, and (iii) a business that has opportunity to be a catalyst. Pershing Square previously had a highly publicized campaign in Canada Pacific from 2011 to 2016, delivering a 153.30% return on their 13D position compared to 70.13% for the S&P 500 .

What is happening?

Behind the scene

Pershing Square previously submitted 13D on Canada Pacific on October 28, 2011 and it has become one of the activists’ most successful and significant campaigns of the past 20 years. There are three key elements to an active campaign: (i) developing a plan to create value, (ii) initiating execution of the plan, and (iii) successfully implementing it. Pershing Square impresses on all accounts. They developed a plan to replace the CEO with Hunter Harrison, the “Michael Jordan” of Railroad CEOs. They fought a long and tough proxy war with very high difficulty at the time and eventually replaced most of the board. Furthermore, the execution of the plan went as expected or better than expected, creating significant value for shareholders. Pershing Square reluctantly exited this investment with a 153% return in 2016 when the stock was trading at $27.28 per share (split adjusted) due to a series of buyback requests involving Pershing Square’s other investments.

Their fingerprints are everywhere in the company these days. Since then, they have been tracking Canada Pacific, looking for a good investment, which has never come as the company’s stock has almost straight up since. The opportunity now presents itself in the form of the Canada Pacific/Kansas City Southern merger. While the acquisition has closed, the merger is still subject to final approval by the Surface Transportation Board, which is expected to be received in Q4 2022.

On a standalone basis, Canadian Pacific has performed exceptionally well, with Hunter Harrison, who mentors Keith Creel at the helm since Harrison’s departure. Creel did, and continues to do, an incredible job in growing the company and running it efficiently. Canadian Pacific’s merger with KCS will create a single rail link between Mexico, the US, and Canada, and provide an opportunity for revenue growth and efficiency. In terms of effectiveness, Creel can apply the same discipline that he and Hunter Harrison used at CP to optimize KCS’s performance.

But the better opportunity is on the revenue side. Most importantly, having a single rail line that can efficiently transport goods from Canada to Mexico is a huge advantage in attracting customers. However, there are also some other downsides that have been highlighted and exaggerated by the current war in Ukraine. First, the United States is pushing to improve its infrastructure, which will lead to more freight movement around the country. Second, with gas volumes at historic highs, companies will be looking for the cheapest way to ship their goods. Third, North American companies are no longer willing to rely on China as a distribution partner and are looking for ways to keep their supply chains closer to home. The war in Ukraine and the possibility of a future Chinese attack on Taiwan have raised this concern.

Also, there is an ESG benefit here as rail is an energy efficient way to transport goods. Using 50 railcars to transport food from California to Ohio instead of trucks would put 126 trucks on the road and remove 391.5 tons of carbon dioxide released into the atmosphere, according to the Association of American Railroads. load is used.

We expect Canada Pacific 2.0 to be a very different situation than the first. Bill Ackman likes this CEO. In fact, he is partly responsible for his being there. This would be very friendly, and if Pershing Square had a board seat here, it would support management as a long-term investor in a big investment for them. When you have top management in an industry, you want to add assets and revenue to that industry. That’s exactly what Pershing Square sees happening in the Canadian Pacific.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder performance, and the founder and portfolio manager of 13D Activity Fund, a mutual fund. invest in a portfolio of 13D activists.

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