CN Rail announces new strategic plan to fend off activist investor

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Canadian National Railway Co. is slashing capital spending as it faces an activist investor in the aftermath of its failed deal to acquire Kansas City Southern.

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The Montreal-based railway announced on Friday a new strategic plan to boost profits, cut costs and resume share buybacks. It’s the company’s latest move as it tries to regain ground with shareholders after losing out to rival Canadian Pacific Railway Ltd.

Kansas City Southern ended a five-month sparring match between two of Canada’s largest railways when it changed course and terminated its deal with Canadian National in favour of Canadian Pacific on Sunday.

The deal would create the first railway spanning Canada, the United States and Mexico.

TCI Fund Management Ltd. — which is one of Canadian National’s largest shareholders — previously opposed Canadian National’s bid for the U.S. railway. On Monday, it launched a proxy fight to unseat chief executive officer Jean-Jacques Ruest and four board members, saying the railway operator’s failure to accomplish the deal was the result of “flawed decision making.”

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The deal fell through after U.S. regulators rejected Canadian National’s proposed voting trust, a critical component in its bid. The trust would have allowed Kansas City Southern shareholders to receive the cash-and-share offer before getting regulatory review.

“The bid for KCS exposed a basic misunderstanding of the railroad industry and regulatory environment,” TCI founder and managing partner Chris Hohn said in a statement.

On Friday morning, the firm formally requested a shareholder meeting to vote on its proposal by Dec. 1, according to a regulatory filing.

As part of its announcement, Canadian National said it plans to raise operating income by $700 million and boost earnings per share by 20 per cent next year. It also aims to improve its operating ratio, an industry metric that measures efficiency, to 57 per cent in 2022. Its ratio was 61.6 per cent in the previous quarter.

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“I am confident that CN’s senior management, a team of world-class railroaders who are focused on redefining the rail industry, have the skills and determination to lead the company into this exciting next phase,” board chair Robert Pace said in a statement.

But analysts were already expecting Canadian National to improve its operating income by approximately $800 million, putting the railway’s new target lower than average estimates, according to National Bank analyst Cameron Doerksen.

“Much of operating income improvement (was) already expected,” Doerksen said in a note to clients. “One of the key criticisms of Canadian National recently is the fact that EBIT (earnings before interest and taxes) has not materially improved over the past five to six years.”

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Canadian National defended its plan to snatch Kansas City Southern from its rival, and reassured investors that its executive team and board are capable of continuing to lead the company.

The railway also said Pace’s term expires next year and that he will not run for re-election.

“We fully appreciate that our bid for KCS may not have been in CP’s interest, but it has absolutely served CN’s interest despite the disappointing outcome,” Ruest said during a conference call with analysts on Friday.

CN’s stock rose 2.4 per cent to $150.39 per share on the Toronto Stock Exchange on Friday.

Financial Post

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