Ackman’s Pershing Sq. is again at Canadian Pacific. Here is what’s forward

A Canadian Pacific Railway locomotive pulls a practice in Calgary, Alberta, Canada, on Monday, March 22, 2021.

Alex Ramadan | Bloomberg | Getty Photos

Firm: Canadian Pacific (CP)

Enterprise: Canadian Pacific owns and operates a transcontinental freight railway in Canada and the US. The corporate transports bulk commodities, together with grain, coal, potash, fertilizers, and sulfur. It additionally strikes merchandise freight, reminiscent of vitality, chemical compounds and plastics, metals, minerals, and shopper, automotive, and forest merchandise. Additional, Canadian Pacific additionally transports intermodal site visitors comprising retail items in abroad containers. The corporate presents rail and intermodal transportation providers by a community of roughly 13,000 miles serving enterprise facilities in Quebec and British Columbia, Canada; and the US Northeast and Midwest areas. By its merger with Kansas Metropolis Southern, Canadian Pacific will now have entry into Mexico, creating the primary single-line rail community that hyperlinks the U.S., Mexico and Canada.

Inventory Market Worth: $72.3B ($77.63 per share)

Activist: Pershing Sq.

Proportion Possession:  1.59%

Common Price: n/a

Activist Commentary: Pershing Sq., managed by Invoice Ackman, is a really effectively revered and profitable activist. Whereas the agency doesn’t take plenty of activist positions relative to different activists, the positions it does take are usually massive, well-conceived and absolutely dedicated. Pershing Sq. usually seems to be for the next: (i) a high-quality enterprise, (ii) easy, predictable, money circulate generative, sturdy development idea and (iii) a enterprise the place there is a chance to be a catalyst. Pershing Sq. beforehand had a well-publicized activist marketing campaign at Canadian Pacific between 2011 and 2016, making a return of 153.30% on their 13D state of affairs versus 70.13% for the S&P 500.

What’s Occurring?

Behind the Scenes

Pershing Sq. beforehand filed a 13D on Canadian Pacific on Oct. 28, 2011, and that turned probably the most profitable and important activist campaigns of the previous 20 years. There are three main components of an activist marketing campaign: (i) creating a plan to create worth, (ii) getting right into a place to implement that plan and (iii) efficiently executing that plan. Pershing Sq. impressed on all accounts. They developed a plan to interchange the CEO with Hunter Harrison, the “Michael Jordan” of railroad CEOs. They fought an extended and laborious proxy struggle with a really excessive diploma of issue on the time and finally changed many of the board. Additional, the execution of the plan went both as anticipated or higher than anticipated, creating important worth for shareholders. Pershing Sq. reluctantly exited this funding with a 153% return in 2016 when the inventory was buying and selling at $27.28 per share (cut up adjusted) because of a slew of redemption requests associated to different Pershing Sq. investments. 

Their fingerprints are all around the current firm. They’ve since been watching Canadian Pacific, in search of entry level for funding, which by no means got here as the corporate’s inventory went virtually straight up since then. The chance now introduced itself within the type of the Canadian Pacific/Kansas Metropolis Southern merger. Whereas the acquisition has closed, the merger continues to be topic to ultimate approval by the Floor Transportation Board, which is predicted to be obtained by the fourth quarter of 2022.

On a standalone foundation, Canadian Pacific has been doing very effectively, with Hunter Harrison mentee Keith Creel on the helm since Harrison’s departure. Creel has completed, and continues to do, a tremendous job rising the corporate and operating it effectively. Canadian Pacific’s merger with KCS will create the one railroad that travels between Mexico, the U.S. and Canada and create alternatives for income development and on the effectivity aspect. With respect to effectivity, Creel can apply the identical self-discipline he and Hunter Harrison utilized at CP to optimize the operations of KCS.  

However the higher alternative is on the income aspect. Most significantly, having a single railroad that may effectively transfer items from Canada all the way in which to Mexico is a big benefit in attracting clients. However there are additionally a number of different tailwinds which have been highlighted and magnified by the current warfare in Ukraine. First, the US is making a push to enhance its infrastructure, which ought to result in extra transportation of products all through the nation. Second, with fuel at traditionally excessive ranges, corporations are going to be in search of the most affordable solution to ship their items. Third, North American corporations have already been shedding their willingness to depend on China as a distribution accomplice and wish to preserve their provide chain nearer to residence. The warfare in Ukraine and the potential for China transferring on Taiwan sooner or later has significantly elevated this concern.

Moreover, there’s an ESG profit right here as railroads are an vitality environment friendly solution to transport items. Based on the affiliation of American Railroads, utilizing 50 rail automobiles to ship meals from California to Ohio as an alternative of vans would take 126 vans off the highway and remove 391.5 tons of carbon dioxide from being launched into the environment if vans have been used.

We anticipate Canadian Pacific 2.0 to be a really totally different state of affairs in comparison with the primary time round. Invoice Ackman likes this CEO. The truth is, he’s considerably liable for him being there. This will probably be very amicable and if Pershing Sq. does take a board seat right here, it will likely be to help administration as a long-term investor in a big funding for them. When you might have the premier administration crew in an trade, you wish to add property and income to it. That’s precisely what Pershing Sq. sees taking place at Canadian Pacific.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.

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