A private equity firm’s new minority stake in Canadian Pacific Railway is triggering suggestions of a large reorganization and even a potential outright sale of Canada’s second-largest railroad in a sudden consolidation of the North American rail industry.
The speculation included Berkshire Hathaway, the Warren Buffett-led firm that acquired BNSF Railway two years ago. Peter Nesvold, a Jefferies & Co. analyst, said in a note to clients that Berkshire could be a buyer, according to a report by Bloomberg News.
The conjecture came after private equity firm Pershing Square Capital Management acquired a 12.2 percent stake in CP and said it expects to hold talks with management.
Another analyst, RBC Capital Markets’ Walter Spraklin, said a Canadian pension fund or other non-railroad interest would be a more likely buyer, according to Bloomberg.
Canadian Pacific declined comment, saying conversations with shareholders are private. But the company responded to internal employee questions about the Pershing stake by saying, "As with others, CP is open to the views of its shareholders," according to spokesman Ed Greenberg. "We will speak with Pershing Square to hear their input into our plan, already targeted at realizing greater efficiency and improved service reliability."
Pershing Square over the past year has acquired stakes in Fortune Brands and J.C. Penney, the United States’ third-largest department store chain. It revealed its CP stake after trading closed on Friday in a 13D filing with the Securities and Exchange Commission. William Ackman, Pershing’s founder and manager, is known for targeting companies he sees as undervalued, then pressuring management for changes that would drive up the stock. His funds also have been tied to Target and Borders.
In its filing, Pershing said it believes CP’s “common shares are undervalued and are an attractive investment.” The firm said it expects “to engage in discussions with management, the board, other stockholders … and other relevant parties concerning the business, management, operations, assets, capitalization, financial condition, governance, strategy and future plans” of the railroad.
In his note to clients, Nesvold said Berkshire could be a potential CP suitor if Pershing urges a “strategic tie-up,” Bloomberg reported. Acquiring CP would give BNSF coverage of the entire western U.S. and Canada, Nesvold wrote, adding a joint venture with Kansas City Southern, which would create the first trans-North American railroad, also could “be worth further study.”
CP has struggled this year with severe weather problems that have eroded earnings. Third quarter profit fell 5.3 percent to $184 million as increasing costs outpaced a 4.3 percent increase in revenue, to $1.32 billion.