There was little fanfare accompanying last week’s terse announcement that Canadian Pacific (CP) Ltd. of Montreal is selling its 60.7-per-cent stake in Canadian Pacific Forest Products Ltd. to a group of underwriters for $697.8 million. Still, the statement marked the end of an era. CP has traditionally served as a proxy for the Canadian economy, especially among foreign investors, because its widely diversified holdings offer exposure to all key economic sectors. With the elimination of forest products from that mix, the company suddenly forfeits that proxy status. But, as the company’s chairman, William Stinson, follows through on his strategy of streamlining CP and narrowing its focus on fewer areas, forest products may be just the first in a series of sales that will change the shape of the sprawling company. In addition to its historic railway and landmark hotels, CP still has significant investments in the domestic energy sector, real estate, telecommunications and waste management. As Stinson told Maclean’s in a recent interview: “We want to marshal our resources and slim down. You can only support so many businesses.”
CP Forest Products was clearly in need of parental help. As global commodity prices have languished, the pulp, paper and lumber company has lost about $1 billion since 1990—including $248 million in 1992 and $572 million in 1991. In January, it suspended payment of its 40-cent annual dividend to shareholders—including CP. Over that same period, CP Forest has also spent more than $1 billion to modernize and rationalize its facilities and to comply with increasingly stringent environmental regulations. CP’s coolness towards its problem child has been apparent over the past year as it has steadily diminished its stake in the company from 79.7 per cent to the current level by not participating in CP Forest’s past two share offerings. Even though CP is unloading its forestry assets near the bottom of an industry cycle, Richard Kelertas, senior forest products analyst with McLean McCarthy Inc. in Montreal said, “They [CP] lost patience—they don’t see things turning around soon.”
While lumber prices have strengthened dramatically over the past several months,
world prices for pulp and paper have remained depressed. More than 80 per cent of CP Forest’s 1992 revenues of $1.8 billion came from newsprint and wood pulp production. The company had already attempted to capitalize on the lumber boom by selling off 49 per cent of its British Columbia lumber business in a separate subsidiary in July. That initiative raised $230 million. Even so, analysts expect that CP Forest will lose more than $300 million in 1993. “Nobody at CP Forest is doing anything terribly wrong,” said one forestry analyst who asked not to be named. “They have just had to deal with really horrible commodity prices.”
In the official announcement of the CP Forest divestment, Stinson stated: “We have concluded that CP Forest does not fit into our core business strategy.” Just which of the company’s extensive assets is considered to be “core” is not yet apparent, although Stinson told Maclean’s that “a thorough analysis” of the competitive position of all CP’s holdings is under way. He indicated, however, that both energy sectors and railways were likely to be retained and bolstered over time. Pan-
Canadian Petroleum Ltd. and Fording Coal Ltd. both of Calgary, he noted, “are in a strong position in Canadian terms and world terms.” He added, “They’ve proven that they can grow and be rewarding to shareholders.” Stinson also said that, despite recent problems with CP Rail, “The Americans have proven that rail can be a very profitable business.”
Because of the company’s financial situation and the large number of shares being sold, CP Forest is being sold to investors using “instalment receipts.” That format has become popular in the investment industry over the past year as other major companies, including Noranda Forest Inc. and Brascan Ltd., have sold major subsidiaries into public markets. The CP Forest shares have been priced at $19 each, but investors will be allowed to pay that amount over a series of three instalments—$6 initially, followed by $6.50 on Sept. 30, 1994, and $6.50 on Sept. 29, 1995. That strategy allows CP to easily sell a large block of shares into the market by appealing to both retail and institutional shareholders. For a cash investment of only $6, they have a call on CP Forest shares and can profit from any price appreciation without paying the full $19 price tag.
In addition, over the past six months, there has been a significant increase in the volume and variety of forest products stocks available to Canadian investors. In February, Noranda Forest sold a 49-per-cent interest in MacMillan Bloedel Ltd. of Vancouver to the public for $971.5 million. That transaction also used instalment receipts. Last week, Stone Container Corp. of Chicago, which acquired ConsolidatedBathurst Inc. for $2.6 billion in 1989, announced that it was planning to take part of its wholly owned Quebec subsidiary public in October to reduce its $5.4 billion debt load.
For Canadian investors— especially pension fund and money managers who are required to invest the bulk of their assets domestically—the release of these companies from controlling shareholders is welcome, For years, domestic and foreign investors have cornplained about the high degree of corporate concentration in Canada that can make it difficult to obtain large volumes of a stock or to trade it without causing volatility in the market. And if Bill Stinson takes another step in his strategy and sells more from CP’s asset base, they may soon have reason to applaud again.
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