(The following story by Brent Jang appeared on the Globe and Mail website on July 25.)
TORONTO — Canadian Pacific Railway Ltd. chief executive officer Fred Green says his company intends to stick to its internal growth strategy, playing down the need to attract a suitor.
A group led by Toronto-based Brookfield Asset Management Inc. sought to acquire CPR in April, proposing that the company be divided into a real estate division that would own the tracks and a separate entity that would run the trains.
“It’s a model that’s been around for at least a couple of years, if not longer,” Mr. Green said yesterday during a conference call. “Every investment banker and their brothers have walked it around to the different companies. We have looked at it in the past, but we’ve never found any form of compelling economic business case to proceed. I guess you never say never – maybe somebody can develop or create a new angle that we haven’t thought about.”
Mr. Green made the comments after CPR announced that it posted a second-quarter profit of $257-million, down 32 per cent from $378-million in the same period last year, when it enjoyed a $176-million cut in future tax expenses. Excluding extraordinary items, CPR’s share profit was $1.12, in line with analysts’ estimates.
While Calgary-based CPR rebuffed Brookfield’s offer, industry observers expect a bidding war for the railway.
Mr. Green cast doubt on whether splitting CPR into two major pieces would be the best corporate route to go, from a rail safety standpoint.
“We really have to be sure that whatever model is being contemplated considers safety, and it considers the infrastructure and the ability to run trains as safely or more safely than we do today,” he said.
CPR reiterated its outlook for 2007, forecasting diluted earnings per share will be from $4.30 to $4.45. That contrasts with rival Canadian National Railway Co., which on Monday reduced its 2007 forecast of EPS growth to 5 per cent, compared with its original estimate of more than 10 per cent.
On Monday, CN chief financial officer Claude Mongeau said the railway considered breaking itself into real estate and train operating divisions, but rejected the concept.
Mr. Green said CPR’s growth plans for 2008 will be announced this fall. Already, the railway has a number of promising ventures, including a major expansion of its track network serving Edmonton-area refineries and petroleum processing plants.
In the first half of 2007, CPR had success transporting Honda and Toyota cars built in Ontario, offsetting weakness in forest product deliveries.
A strike during the second quarter by the Teamsters Canada Rail Conference’s maintenance of way employees division lasted 26 days. Despite that labour setback and higher fuel bills, CPR’s operating ratio – a key indicator of productivity that measures operating costs as a percentage of revenue – was 74.7 per cent in the latest quarter. As a lower ratio is better, that was an improvement from the 75-per-cent ratio in the same period in 2006.