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Canadian Pacific Railway Ltd.'s chief executive officer is firing back at the shareholder seeking to oust him, telling employees Wednesday the 2008 acquisition of the DM&E railroad was the right move.
"In addition to providing an attractive return on capital and continuing to generate strong revenues and earnings, the acquisition of the DM&E brought in a team of top-level railroaders and, most importantly, further extended the reach of CP into the U.S. Midwest, a vital part of our network," Fred Green said in an internal note, which was released to the media.
Pershing Square Capital Management hosted a town hall meeting in Toronto earlier this week to outline why it wants to replace Green with Hunter Harrison, who retired as CEO from rival Canadian National Railway two years ago and is itching to get back into the business.
The New York hedge fund has amassed a 14.2 per cent stake in CP since the fall, and is looking to persuade fellow investors to vote five of its nominees to the company's board of directors at its May annual meeting.
In its presentation, Pershing called CP's $1.5-billion acquisition of DM&E in 2008 a mistake that was irresponsibly financed and had no strategic rationale.
But Green said the deal has helped create "North America's most diversified grain franchise and provided access to fast-growing energy and industrial products markets, including ethanol."
He said the acquisition has delivered on its operational synergy targets, and that it will play a key role in future volume growth.
Green's note also took aim at Pershing Square's view that the board of directors isn't holding management accountable.
"From vice-presidents upwards, 75 per cent of at-risk compensation is based on CP's financial performance targets set by the board. My own compensation follows this structure as well," he wrote.
He added the board's interests are aligned with those of CP shareholders.
"As publicly disclosed, over 92 per cent of the compensation provided to our independent directors in 2010 was provided in deferred share units and compensation in 2011 is consistent with that."
Since Friday's close — the trading day before Pershing's presentation — Canadian Pacific shares have risen more than four per cent to close Wednesday up 93 cents at $76.53.
Following the Pershing town hall, CIBC World Markets analyst Jacob Bout raised his share price target on CP from $77 to $82.
Although he agrees with some of Pershing's arguments, he said in a research note may take longer than it assumes to make material changes at the railroad.
For instance, Pershing Square is aiming to improve CP's operating ratio — expenses as a percentage of revenues — from its 2011 level of 81.3 to 65 by 2015. Bout said that's unlikely to be achieved before 2017.
"While it is unclear if Pershing's proxy battle will be successful (or that it will come down to a showdown in May), what is clear is that change is likely and that CP's operational underperformance is finally being addressed," Bout wrote.
Canadian Pacific, meanwhile, is targeting an operating ratio of between 70 to 72 by 2014. It has called Pershing Square's targets unrealistic, as no railway has been able to achieve so steep a drop in so little time.