From the New York Times - February 14, 2001

A Canadian Rail Pioneer Plans Split-Up

by Timothy Pritchard

TORONTO, Feb. 13 — Canadian Pacific Ltd., which built the railroad that linked Canada's prairies to the west coast in the 1880's and later expanded into a conglomerate, announced plans today to split itself into five publicly traded companies, a move intended to mollify holders of the company's lagging stock.

Executives at Canadian Pacific, based in Calgary, have been hinting at a breakup for more than a year, and rumors over the last month about such a plan had lifted the stock price 25 percent. Today, the company's New York-traded shares rose $3.51 more, to $37.45.

Under the breakup plan, stockholders will be given the 86 percent of PanCanadian Petroleumthat Canadian Pacific owns and all of Fording Coal, Canadian Pacific Railway and CP Ships. Canadian Pacific Hotels will be the only significant holding to remain part of the parent company.

Canadian Pacific's chief executive, David P. O'Brien, said the revamping would "reward our shareholders now, by unlocking the full value of each business, and in the future by providing them an excellent opportunity to participate in further growth and development."

The conglomerate now comprises transportation, natural resources and hotel and property holdings. Each new company will be allocated equity and debt that reflect its growth prospects and industry norms. Because PanCanadian Petroleum has a high equity-to-debt ratio, it will pay a special dividend, most of it to the parent company.

The plan, which requires shareholder and court approval, is not expected to have adverse tax implications for Canadian shareholders. The company said it was seeking similar assurances from American tax authorities. If there are no hitches, Canadian Pacific expects the breakup to be completed this fall.

Like those of many conglomerates, the shares of Canadian Pacific have traded at a discount to their asset value — until recently put as high as 25 percent by investment analysts. And while some of the company's divisions performed poorly in the past, most have done well enough lately to convince the board that the timing for a breakup is right.

Last year, the company reported a profit of 1.75 billion Canadian dollars ($1.15 billion), twice as much as in 1999. Revenue increased 40 percent.

PanCanadian Petroleum was the most profitable division last year, more than tripling its net income to 894 million Canadian dollars, or $587.5 million. The railroad company also improved, with its profit rising 46 percent to 532 million Canadian dollars, or $349.6 million, as did the shipping company, which more than doubled its net income.

Fording, which had been hurt by low coal prices, slightly improved its profit, to 33 million Canadian dollars, or $21.69 million. The hotel and real estate unit posted a 30 percent gain.

Railroad earnings, though, have suffered from comparisons with Canadian National Railway, which has sharply reduced employment over several years and eliminated unprofitable routes. Canadian Pacific has closed the gap in the last year with its own cost cuts, including the elimination of almost 2,000 jobs.

Spinning off Canadian Pacific's rail businesses encourages speculation that the two big railroads will eventually merge. They increasingly share track and other facilities, and Canadian National's chief executive, Paul M. Tellier, recently asked the government to review legislation with the aim of further consolidation.