Farewell, Canadian Pacific. Hello, five new companies.
The very last spike
Farewell, Canadian Pacific. Hello, five new companies.
By Robert Sheppard
Stand fast, Craigellachie! Somewhere near that craggy mountain pass in British Columbia, where a last spike welded Canada together a century ago with a ribbon of steel, the ground is shifting. The mighty corporate empire that began life as the Canadian Pacific Railway is about to leave this mortal coil. By the end of this year, if corporate planners get their way and the stock markets don’t go kaflooey, Canadian Pacific Ltd.—worth $18 billion and growing again suddenly—will transform itself from a gawky behemoth into five separate companies, each with its own set of singleminded shareholders.
In Canada’s corporate canyons, pension and mutual fund managers are already licking their lips in anticipation of the whole being less than the sum of its parts. And somewhere on the frozen Prairies a farmer is probably humming a few lines of that ancient hymn to the Canadian Establishment. What was the refrain again? Oh, yeah, “God damn the CPR!”
May it rest in pieces. The plan unveiled last week at Toronto’s Fairmont Royal York Hotel caught everyone a bit
by surprise. Corporate analysts have said for years that Calgary-based CP has been underperforming—it may even be ripe for a takeover—and to get the respect of the market it should spin off some of its core businesses. Few anticipated it would divest all at once—oil and gas, hotels, rail, ships and coal—leaving nothing behind but the grin of the corporate cat.
“I think it was really only in the fall that I started to seriously contemplate that this was the best solution,” CP chairman and CEO David O’Brien told Macleans. “One of the alternatives was to spin off [oil and gas producer] PanCanadian. But I felt that if we did that, it would just be a slow dance and the market would come back and say, well spin something else off’ So I said, why don’t we give them all a shot. It’s a bit like the kids growing up and leaving the parents’ home.”
Some kids. The biggest by far is Calgary-based PanCanadian Petroleum Ftd. With $7.2 billion in revenues, it accounted for nearly half of its parent’s $1.8billion profit last year. Next in line is Fondon-based CP Ships (80 container ships, $3.9 billion in revenue), followed closely by venerable Canadian Pacific Railway with 22,000 km of track in Canada and the United States and revenues of $3.5 billion. The babies are Toronto-based CP Hotels (30,000 rooms under management around the world, $833 million in revenue) and Calgary’s Fording Coal Ltd., the largest exporter of western coking coal, with $896 million in sales last year.
Can they make it on their own? The markets seem to think so. CP’s share price jumped 11 per cent on the announcement, closing the week at $57.25, and some predict the stock will soar into the $70 range by the time this deal is completed in the fall.
For former Montrealer O’Brien, 59, who will give up the reins when the deal is done, this move brings full circle the history of a company that began with some of Montreal’s greatest corporate adventurers. For most of a hundred years, Canadian Pacific, with its many corporate offspring and wealth of historic railway lands, was Canada to most investors. The CPR was both the promise that brought British Columbia into Confederation and the financing scandal that
brought down Sir John A. Macdonalds government. Once it cranked into high gear at the turn of the century, it opened the Canadian West to waves of new immigrants, mineral wealth beyond most peoples wildest dreams and a refined sense of political grievance that has been handed down through generations.
Now, O’Brien is presiding over the third and final stage of CP’s dismemberment. In the 1980s, the company shed at least seven subsidiaries, including the mining company Comineo, Algoma Steel and CP Air, precursor of nowdefunct Canadian Airlines. O’Brien faced a series of debilitating national strikes and bleeding profits when he came aboard in 1995. But he managed to get rid of Marathon Realty in 1996 and moneylosing Laidlaw Inc., a waste hauler, in 1997. And to bulk up the remaining businesses with foreign acquisitions.
Where he was going with this he wasn’t really sure, he admits now. But when the penny dropped last fall, the project moved ahead very quickly. Only three people knew the overall plan. The board was told “in conceptual terms” in December, the CEOs of the major units just a week before the scheme was formally adopted on Feb. 12.
And what of the future? Well, PanCanadian is big enough—bigger even than PetroCanada—to be a major oilpatch player, maybe even an acquisitor. The hotel business, which operates under the Delta and Fairmont brands, is the second-largest chain in the world, wellpositioned in the luxury market. The others may have to scramble for their existence. Fording could well be folded into a larger operation. CP Ships will likely see its shareholder base shift to international owners. CPR is a natural takeover target in the anticipated consolidation ofNorth American railways, many say. Even Canadian National chairman Paul Tellier has expressed an interest, should Ottawa change its competition rules. If that happens, and given that the upmarket hotel chain does not sell itself under the Canadian Pacific label anymore, there will not be much left of the storied CP name. Stand fast, Craigellachie, indeed, as financier George Stephen wired his desperate cousin Donald Smith in 1884. Money is on the way. ES
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