25 August 2005
Breaking Up is Not Always Hard to Do
The "starburst" breakup four years ago of Canadian Pacific Ltd. has more than doubled the
wealth of any investor who held on to equity of the five subsidiaries that were spun off.
For investors, CP was the one-stop stock for those looking for exposure to the Canadian economy.
However, it would have taken a prescient investor to guess that among those assets - a railway, a first-class hotel
chain, a shipping line, an oil company and a coal mining company - the coal would turn out to be the diamond.
In exchange for every 100 shares of CP, an investor was given 50 shares of Canadian Pacific Railway Ltd., 25 of CP Ships Ltd., 25 of
Fairmont Hotels & Resorts Inc., 68.4 shares of PanCanadian Petroleum Ltd. and 16.6 shares of Fording Inc., a coal mining company.
"My job was to get them all ready so that when they went out on their own, they could stand on their own feet," said David
O'Brien, who was chief executive officer of CP at the time and is now chairman of EnCana Corp. "There was some nostalgia because
of the long history, but I recognized that as long as the conglomerate was there, the shares would trade at a significant
discount."
When Mr. O'Brien took over CP in 1995 it had a market capitalization of about $6.7-billion. If CP had been kept intact
its shareholdings would now be worth $42-billion.
That package of securities that formed the CP conglomerate was worth about $61 a share by the time the financial details of the
restructuring were disclosed on 31 Jul 2001, based on one analyst's estimate of the underlying share values. The CP
shares closed that day at $58.30 apiece on the Toronto Stock Exchange.
When CP first proposed on 12 Feb 2001, that it was planning to spin off its five subsidiaries, the CP shares traded
at $51.55 each. What is known as the "conglomerate discount" had all but disappeared in six months.
But for those who held on to the package of strategic investments, it has proven to be an excellent investment.
Today those securities, adjusted for share splits, mergers and takeovers, would be equivalent to about $130 for each old CP share,
up 152 percent. That does not include any return from dividends.
"[The management of CP] at the time obviously treated shareholders very well," said Fred Ketchen, head trader of Scotia
Capital Inc. "Based upon what has happened since they took it apart, I'm happy they took it apart."
It was such a widely held company that Merrill Lynch & Co. Inc. set up an exchange-traded fund for small investors
to hold the five successor companies to CP. CP Holdrs (HCH-TSX) continues to trade on the Toronto Stock Exchange with
the depositary receipts closing yesterday at $133.71, up from a 52-week low of $74.10.
"It was clearly one of the senior industrial and commercial groups in Canada," said Michael Smedley, chief executive officer
and portfolio manager at Morgan Meighen & Associates Ltd.
Most of the increase in value has taken place during the past year as a result of the rise in energy prices and the stunning economic
growth in Asia, which has pushed the demand for raw materials up. That, in turn, has also helped to boost shipping rates.
But it was an inauspicious beginning for the five companies that only began trading publicly on 3 Oct 2001, just a few
weeks after the 11 Sep 2001 terrorist attacks on New York and Washington. CP shares had fallen almost 14 percent to $50.37
since the disclosure of the financial details of the restructuring.
The beginning of public trading marked the nadir for each of the companies within the group.
Fording Coal
In early 2003, Sherritt International Corp. and Ontario Teachers Pension Plan Board offered Fording shareholders either $35 cash or a
unit in a new coal income trust. Those units closed yesterday at $134.67, well above the $27 share price when the terms of the CP
spinoff were first disclosed.
PanCanadian
In early 2002, Mr. O'Brien was engaged in the negotiations that resulted in the merger of PanCanadian and Alberta Energy Co. to form
EnCana Corp. Each share of PanCanadian effectively became a share of EnCana, which split on a two-for-one basis in May,
2005. The shares of EnCana closed yesterday at $52.95, compared with $19.19 (adjusted for the stock split) at the time of the CP
valuation.
Canadian Pacific Railway
The CPR shares increased to $46.15 yesterday up from $26 four years ago. The shares have been helped by higher rates charged for
shipping coal, and because of the boom in exports and imports.
CP Ships
Thanks to this week's proposed $2-billion (U.S.) takeover of CP Ships by TUI AG of Germany, the shares of CP Ships
increased to $25.77 from $11.20 when public trading began.
Fairmont
The hotel and resort chain was among those hit hardest by the 11 Sep 2001 attacks. When public trading began the shares
were trading around $24, which was far short of the $40 price they were trading at on a "when-issued" basis in
August. The shares closed yesterday at $37.43 on the TSX.
Bread Basket
This single security, which represents all five CP spinoffs, is up 177 percent since 2 Oct 2001.
Yesterday's close: $133.71, up $2.80
The sum of its parts
The breakup four years ago of Canadian Pacific has swelled the wealth of investors who hung on to any of the five companies that were
spun off, but few would have guessed that coal would emerge as the true gem.
CP Ships
The proposed takeover of CP Ships by Germany's TUI AG last week gave the shares more buoyancy. When trading began in October, 2001,
the shares traded at $11.20.
TEU-TSX
Yesterday's close: $25.77, up 12 cents
Canadian Pacific Railways
CP Rail is able to charge higher rates as a result of higher coal prices and rising imports and exports from Asia. The shares are up
about 78 percent since the restructuring.
CP-TSX
Yesterday's close: $46.15, down 23 cents
Fairmont Hotels & Resorts
Fairmont has faced headwinds since the 9/11 terrorist attacks in the United States and SARS in Canada, but they began trading around
$24.
FHR-TSX
Yesterday's close: $37.43, up 5 cents
EnCana
EnCana has been in the sweetspot of rising oil and gas prices. After CP spun off PanCanadian Petroleum, it merged with Alberta Energy,
to create one of the largest domestic oil and gas companies in Canada.
ECA-TSX
Yesterday's close: $52.95, up $1.21
Fording Canadian Coal Trust
Fording is the big winner as a result of Asian demand for metallurgical and thermal coal. Fording said yesterday it was splitting its
units on a three-for-one basis.
FHR-TSX
Yesterday's close: $134.67, up $1.17
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