28 January 2009
Share Offering Insurance for CP Rail
After reporting better-than-expected fourth quarter
earnings Tuesday, Canadian Pacific Railway Ltd. said it would issue 12.6 million shares to a syndicate of underwriters at $36.75 per
share - a 9% discount on where the stock closed yesterday. The deal also carries the option of another 1.3 million shares being issued
within of month of it closing, potentially raising its value to $511-million.
While CP was believed to have a strong enough balance sheet and operations to cover its costs, Fadi Chamoun, UBS analyst, called the
plan "a degree of insurance" in these uncertain times.
"We believe that CP is well placed to generate enough cash from operations to meet its debt and increased pension funding
obligations over the next three years exclusive of the equity offering. However, this assumes an economic recovery sometime in 2010,
sustained pricing power, and a benign regulatory context - all highly uncertain assumptions," Mr. Chamoun said in a note to
clients.
He said his earnings estimate would have remained largely unchanged on CP's fourth quarter result, but because of the dilution effect
resulting from the equity issue, he was lowering his earnings per share outlook by about 7% per year on average. He, therefore,
reduced his price target to $66 a share, from $73, but maintained his buy on the stock.
Shares in CP dropped roughly 3.75 percentage points to $38.90 in early morning trading on the Toronto Stock Exchange, after a 7% rise
on Tuesday following its earnings.
DBRS said Wednesday it viewed the move as "positive" for the company and "prudent" in these times, even though
"liquidity in 2009 is not an issue." In particular, the equity issue reduces the risk of refinancing related to term debt
maturing in 2010.
It also alleviates some of the concern about the macroeconomic and credit markets, a high degree of uncertainty in its operating
environment over the near to medium term, and its sizable pension obligations in 2010 of up to $375-million, the rating
agency said.
"CP has not specifically outlined planned uses of the proceeds, DBRS expects a sizable portion will be directed towards debt
repayment," DBRS said in a note, but added no rating action was warranted on the news.
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