While he wouldn’t directly address reports that Canadian Pacific Railway Limited (TSE:CP) (NYSE:CP) approached CSX Corporation (NYSE:CSX) about possible merger this past week, Pershing Square Capital Management founder Bill Ackman hinted that he is in favor of some kind of merger to improve the operational efficiency of Canadian Pacific, which his firm has an 8% stake in.
“You take the management of CP, which has done an incredible job, and you combine it with another rail where they can get the benefit of combined management teams in addressing problems,” said Ackman, reports David George-Cosh at the Wall Street Journal. “The only way that we are meaningfully improve the fluidity and efficiency of rails is operational. You’re not going to build a new railroad across the country.”
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Canadian Pacific has been a big win for Ackman so far
When Ackman first set his sights on Canadian Pacific Railway Limited (TSE:CP) (NYSE:CP) more than two years ago, the railroad had been lagging its competitors for more than five years, giving the activist an opening to get some of his own people on the board and start improving performance. Since then the railroad’s stock price has roughly tripled, even after a sharp correction in recent weeks, and is up 63% in the last year, impressive returns even in this bull market.
But as Ackman points out, railroads can’t expand in the traditional sense because building new railroads isn’t really an option. Ackman’s investment in Canadian Pacific Railway Limited (TSE:CP) (NYSE:CP) has already been a huge win, but if he wants it to keep growing he’ll have to find ways to increase Canadian Pacific’s reach. Assuming it can pass regulatory muster (which is definitely not a given), merging with a railroad that serves different parts of the continent would do just that.
Candian Pacific may continue pursuing CSX deal
CSX Corporation (NYSE:CSX) apparently took a pass on Canadian Pacific Railway Limited’s (TSE:CP) (NYSE:CP) offer, but the rationale behind it remains. While it’s possible that Canadian Pacific will approach other railroad companies, if Ackman believes that this particular merger is significantly more attractive than the other alternatives (or simply more likely to be approved), it wouldn’t be out of character for him to pressure CSX management and ultimately go straight to the company’s shareholders and push for vote. The situation is exactly analogous, but that’s more or less the game plan he followed when attempting to engineer the acquisition of Allergan, Inc. (NYSE:AGN) by Valeant Pharmaceuticals Intl Inc (NYSE:VRX).