Ownership percentage:  1.59%

Average Cost: n/a

Commentary of an activist:Bill Ackman manages Pershing Square. He is an extremely respected activist. While Pershing Square does not typically take many activist positions in comparison to other activists it takes, its positions are usually large and well-thought. Pershing Square looks for three things: (i.) A high-quality company, (ii.) Simple, predictable, cashflow generative and durable growth concepts, and (iii.) An opportunity to become 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.

Pershing Square had filed a 13D against Canadian Pacific in October 2011. This campaign was among the most important and influential activist campaigns over the past two decades. An activist campaign consists of three main elements: (i. developing a plan that creates value; (ii. getting in a position that can implement it and (iii). successfully executing that plan. Pershing Square was a success on every level. The plan was to replace Hunter Harrison as the railroad’s CEO. After a lengthy and difficult proxy battle, which was fraught with difficulties at times, they were able to replace most of their board members. The execution of this plan was either better or as planned, creating substantial value for shareholders. Pershing Square reluctantly ended this investment in 2016. The stock was trading at $27.28/share (split-adjusted) when Pershing Square received a number of redemption requests. 

They are everywhere in the company. Since then, they have been following Canadian Pacific to find a great entry point for investments. However, that opportunity never arrived as Canadian Pacific’s stock has almost risen straight up. Canadian Pacific/Kansas City Southern was the perfect opportunity. While the acquisition is complete, approval for finalization by the Surface Transportation Board remains pending. The merger should be approved by the end of the fourth quarter in 2022.

Canadian Pacific, a Canadian Pacific mentee, has done very well on its own since Harrison’s departure. Keith Creel, Hunter Harrison’s mentor, is now at the helm. Creel did an outstanding job in growing and managing the company. Canadian Pacific and KCS’ merger will make them the only railroad to travel between Mexico, Canada, and the U.S. This will allow for both revenue growth and efficiency. Creel will be able to apply the same efficiency discipline he applied to Hunter Harrison at CP in order to maximize the operation of KCS.  

However, the revenue side offers the greatest opportunity. It is important to have a single railroad capable of moving goods efficiently from Canada all through Mexico. This will help you attract customers. The current conflict in Ukraine has highlighted several tailwinds and increased their importance. Second, the United States continues to push for infrastructure improvements that will allow more goods to be transported throughout the country. With gas costs at an unprecedented high level, businesses will look for cheaper ways to ship their products. North American companies are now less inclined to depend on China for their distribution partners and prefer to have their own supply chains. This has increased with the threat of China moving towards Taiwan and the conflict in Ukraine.

Railroads can be an efficient and energy-efficient way to transport goods, which is another ESG advantage. The Association of American Railroads estimates that 50 railroad cars would be used to transport food from California to Ohio. This will take 126 trucks off of the roads and prevent 391.5 tonnes of carbon dioxide being released into our atmosphere.

Canadian Pacific 2.0 is expected to have a significantly different outcome than it was the first time. This CEO is a favorite of Bill Ackman. He is actually responsible for his being there. The situation will not be tense and Pershing Square may take up a position on the board. It will be for support of management in large investments. You want to increase assets and revenue when you have the best management team in your industry. Pershing Square is seeing exactly that at Canadian Pacific.

Ken Squire, the president and founder of 13D Monitor is an institution research service that focuses on shareholder activism. He also founded and managed the portfolio for the 13D Activist Fund which invests in a range of activist 13D investments.