1 November 2007
CP Rail Deal to Buy DM&E Looks Like Takeover Defence: Analyst
After an investor's conference in New York City this week,
Canadian Pacific Railway Ltd.'s recent acquisition of Dakota, Minnesota & Eastern is increasingly looking like a move to fend of a
takeover bid rather than creating shareholder value, according to John Larkin, an analyst at Stifel, Nicolaus & Company, Inc.
"The theory being that a strategic project absorbing virtually all free cash flow for the foreseeable future would
semi-permanently repel all the financial buyers that had been lurking around," he said in a note to clients.
The US$200-million CP expects in earnings before interest tax and amortization from the DM&E deal hardly justifies the
US$1.48-billion price tag it agreed to pay, he said, or the extra US$1-billion in contingency payments it
would owe if it decided to go ahead with its plan to expand into the coal-rich region of Wyoming's Powder River Basin.
Many analysts complained at the time of the deal that CP had paid too high a premium and that stakeholders would have been better
served through a share buyback program.
The rationale underpinning the DM&E purchase "was not fully clarified" in New York this week, Mr. Larkin said, adding
that neither were CP's plans for the Powder River Basin.
Mr. Larkin estimates a US$1.8-billion share buyback program instead of the DM&E deal would have added US49 cents a
share to its 2008 earnings per share.
"It is clear to us that the DM&E acquisition will not be as accretive to earnings over the short to medium term as continued
share repurchase would have been," he said. "In addition, we also suspect that the acquisition may not contribute to
shareholder value over the long term."
Mr. Larkin did, however, increase his earnings per share estimates for the fourth quarter, 2008, and 2009 to US$1.21 from US$1.17,
US$4.80 from US$4.54, and US$5.35 from US$4.99, respectively.
He said his earnings revisions reflect the better-than-expected margin improvement in the third quarter, the company's
guidance for 2008, and the further weakening of the U.S. dollar.
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