(The following story by Gordon Pitts appeared on the Globe and Mail website on July 19.)
TORONTO — Fred Green’s reputation in the rail business is that of a bare-knuckle operator who isn’t afraid to wade into a donnybrook.
Among the rank and file of Canadian Pacific Railway Ltd., where he has been chief executive officer for a year, he has earned the sobriquet “Fred the Terminator” for his zeal in cutting costs.
“He likes to push hard,” says a rail industry veteran who has worked with the goateed Mr. Green, a 29-year CPR veteran.
But Mr. Green, 50, has yet to face a crowd as intimidating as the hedge funds, infrastructure investors and private equity players that are about to circle Canada’s iconic rail giant.
CPR was put into play this week, with the news that a private equity group led by Brookfield Asset Management Inc. is preparing a takeover offer.
Sources say the Brookfield group isn’t the only infrastructure investor eyeing CPR. There is also the possibility of a strategic investor, particularly a big U.S. railway that could integrate CPR’s intensely Canadian network into an integrated north-south system.
For all Mr. Green’s vaunted toughness, this new distraction comes at a sensitive time, just as he is building his team and establishing his style – a year after assuming the CEO’s job from a retiring Robert Ritchie. He has been president since 2005.
CPR is undergoing a shift of management generations, as the team that joined the company in the late 1960s gives way to Mr. Green’s young blood. With this shift, “you get an opportunity to rethink the company,” said Randy Cousins, an analyst with BMO Nesbitt Burns Inc.
The consensus is that Mr. Green is aggressively doing that, in overhauling scheduling systems and by forging co-production agreements with other railways, including Canadian counterpart Canadian National Railway Co. It’s a quick way to get cost-efficient growth in a capital-intensive industry.
He is also applauded for bringing in new blood, most recently in the appointment of well-regarded Kathryn McQuade, a hire from Norfolk Southern Corp., as chief operating officer.
It underlines a willingness to embrace cross-fertilization – something the old, more insulated CPR did not often countenance – but it also underlines the new team’s inexperience in working together.
“He is doing a pretty good job,” says Anthony Hatch, an independent rail analyst in New York, in a typically positive, yet jury’s-still-out analysis of Mr. Green’s early tenure.
Now, any hopes he might have had of gradually rejuvenating this company become fainter. Mr. Green faces the distraction of a takeover battle, plus the potential for an impatient new owner that will demand dramatically better performance – with him or without him.
It signals the emergence of a new breed of aggressive railway investor – led by private equity groups that see rail stocks as ripe pickings in the current infrastructure boom, fed by China’s growth and the commodity explosion.
They also see the potential of extraordinary returns by dramatically boosting the debt leverage, and extracting fierce cost cuts or rate hikes on shippers. .
In any takeover binge, CPR would be a nice bite-sized chunk as the smallest of the major North American rail companies. Mr. Hatch has written that the view of the new investors is that if managements don’t promote change, “they are the problem, rather than the solution.”
But Mr. Green, a marketing guy turned railway operator, holds some pretty good cards, Mr. Hatch says. Any bid from an infrastructure fund is unlikely to be hostile, given their typical approach, he suggests. Besides, anyone who runs CPR would have to know the business intimately, rather than be a generic parachuted manager.
But others say CPR would be a nice complement to a strategic buyer, and the best candidates are Norfolk Southern, which already provides CPR with network links into the U.S. Northeast, and Union Pacific Corp., which serves a similar role in the West. Hence, there is the possibility of building a big end-to-end North American system.
But Mr. Green’s major problem is that he is not Hunter Harrison, the veteran railway operator who, as CEO of CN, has forged the firm into the industry leader in cost effectiveness.
While Mr. Green and Mr. Ritchie have made progress, CPR still lags far behind CN in the all important measure of operating ratio – expenses as a proportion of revenue. CN’s ratio is whittled down to about 61 per cent, while CPR last year reached about 75 per cent, down from near 80 per cent in 2003. Mr. Green is determined to keep narrowing the gap. But any private equity player, having loaded up debt, would expect rapid progress on that front. Indeed, observers says a CPR takeover would essentially be an operating-ratio play.
Investors see the gap with CN, the other Canadian railway, and they wonder why it can’t be closed – and quickly, observers say.
Meanwhile, the business of CPR goes on. Yesterday, as takeover rumours buzzed, CPR maintenance workers, who are members of the Teamsters union, ratified a new contract – the culmination of a tough four-week strike.
That strike showcased Mr. Green’s take-no-prisoners style. Early in the strike, he emphasized a resolve to keep freight moving by having managers fill in for workers.
“Quite candidly we can run the railway without this group,” Mr. Green said, which got union leaders boiling mad.
He later apologized, but the comment showed he is willing to play hard. He’ll get more chances to show that side.