Company: Canadian Pacific (CP)
Business: Canadian Pacific owns and operates a transcontinental freight railway in Canada and the United States. The company transports bulk commodities, including grain, coal, potash, fertilizers, and sulfur. It also moves merchandise freight, such as energy, chemicals and plastics, metals, minerals, and consumer, automotive, and forest products. Further, Canadian Pacific also transports intermodal traffic comprising retail goods in overseas containers. The company offers rail and intermodal transportation services through a network of approximately 13,000 miles serving business centers in Quebec and British Columbia, Canada; and the United States Northeast and Midwest regions. Through its merger with Kansas City Southern, Canadian Pacific will now have access into Mexico, creating the first single-line rail network that links the U.S., Mexico and Canada.
Stock Market Value: $72.3B ($77.63 per share)
Activist: Pershing Square
Percentage Ownership: 1.59%
Average Cost: n/a
Activist Commentary: Pershing Square, managed by Bill Ackman, is a very well respected and successful activist. While the firm does not take a lot of activist positions relative to other activists, the positions it does take are generally large, well-conceived and fully committed. Pershing Square typically looks for the following: (i) a high-quality business, (ii) simple, predictable, cash flow generative, durable growth concept and (iii) a business where there is an opportunity to be a catalyst. Pershing Square previously had a well-publicized activist campaign at Canadian Pacific between 2011 and 2016, making a return of 153.30% on their 13D situation versus 70.13% for the S&P 500.
What’s Happening?
On March 7, Pershing Square announced a new position in Canadian Pacific.
Behind the Scenes
Pershing Square previously filed a 13D on Canadian Pacific on Oct. 28, 2011, and that became one of the most successful and significant activist campaigns of the past 20 years. There are three major elements of an activist campaign: (i) developing a plan to create value, (ii) getting into a position to implement that plan and (iii) successfully executing that plan. Pershing Square impressed 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 hard proxy fight with a very high degree of difficulty at the time and ultimately replaced most of the board. Further, the execution of the plan went either 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 slew of redemption requests related to other Pershing Square investments.
Their fingerprints are all over the present company. They have since been watching Canadian Pacific, looking for a good entry point for investment, which never came as the company’s stock went almost straight up since then. The opportunity now presented itself in the form of the Canadian 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 by the fourth quarter of 2022.
On a standalone basis, Canadian Pacific has been doing very well, with Hunter Harrison mentee Keith Creel at the helm since Harrison’s departure. Creel has done, and continues to do, an amazing job growing the company and running it efficiently. Canadian Pacific’s merger with KCS will create the only railroad that travels between Mexico, the U.S. and Canada and create opportunities for revenue growth and on the efficiency side. With respect to efficiency, Creel can apply the same discipline he and Hunter Harrison applied at CP to optimize the operations of KCS.
But the better opportunity is on the revenue side. Most importantly, having a single railroad that can efficiently move goods from Canada all the way to Mexico is a huge advantage in attracting customers. But there are also several other tailwinds that have been highlighted and magnified by the present war in Ukraine. First, the United States is making a push to improve its infrastructure, which should lead to more transportation of goods throughout the country. Second, with gas at historically high levels, companies are going to be looking for the cheapest way to ship their goods. Third, North American companies have already been losing their willingness 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 China moving on Taiwan in the future has greatly elevated this concern.
Additionally, there is an ESG benefit here as railroads are an energy efficient way to transport goods. According to the association of American Railroads, using 50 rail cars to ship food from California to Ohio instead of trucks would take 126 trucks off the road and eliminate 391.5 tons of carbon dioxide from being released into the atmosphere if trucks were used.
We expect Canadian Pacific 2.0 to be a very different situation compared to the first time around. Bill Ackman likes this CEO. In fact, he is somewhat responsible for him being there. This will be very amicable and if Pershing Square does take a board seat here, it will be to support management as a long-term investor in a large investment for them. When you have the premier management team in an industry, you want to add assets and revenue to it. That is exactly what Pershing Square sees happening at Canadian Pacific.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.