OTTAWA — Shareholders of Canadian Pacific Ltd. have discovered breaking up isn’t so hard to do, the National Post reports.
In the seven months since the Calgary-based company deconsolidated into five separate entities, the shares of each have shot up 40% or more.
“From the capital markets perspective it was definitely successful,” said Christopher Schulz, a senior analyst at the New York-based Spin-Off Report.
“You could see the immediate benefits that it could have to investor psychology … investors gain more confidence when they have each asset piece separately.”
Prior to CP’s decision last February to split up, the investment community had long complained that the conglomerate was being penalized by the so-called ‘holding company discount.’ As evidence of the discount, consider that when CP first announced the break-up its shares gained 24%.
Since the shares in each of the offspring began trading separately Oct. 3, they have all appreciated. Fording Inc. (FDG/TSX) is up 41%, Fairmont Hotels & Resorts Inc. (FHR/TSX) is up 53%, CP Ships Ltd. (TEU/TSX) has risen 52% and Canadian Pacific Railway Co. (CP/TSX) has gained 43%.
PanCanadian Energy Corp., which was only 86% owned by CP, differed from the other units in that it was already publicly traded. Between the spin-out and merger with Alberta Energy Co. to form EnCana Corp. in April PanCanadian had risen 31%. By comparison, since Aug. 21 the TSX 300 has risen 3%.
The strong returns can be explained in part by the rebound experienced by many stocks from the post-Sept. 11 trough.
However, the stocks had been trading earlier on a when-issued basis Aug. 21.
Measured from that point, Fording is up 23%, Fairmont has risen 17%, CP Ships Ltd. is up 2% and Canadian Pacific has gained 17%. CP Ltd. was perhaps best known for its earliest businesses, the railway and shipping line.
CPR, whose shares closed up 54¢ at $35.04 yesterday, pleasantly surprised analysts in its most recent quarter. Not only did it surpass analyst earnings expectations but it also significantly improved its operating ratio, a key efficiency measure representing the percentage of revenue needed to run the railway. It fell 3.5 points to 79.9%.
CP Ships has had a more difficult time because its industry is troubled by overcapacity. Capacity in the container shipping business is expected to grow by 10% this year while traffic is seen increasing by 5% at best.
The company, whose shares closed up 50¢ at $17.20 yesterday, took steps to alleviate the situation by striking a deal with other North Atlantic shipping companies last month to cut capacity in the region by 3%.
CP Ships has said the depressed market conditions might have a silver lining as less-well financed shipping companies may become attractive acquisition targets. Fording’s shares have recovered somewhat from a dip following disappointing first quarter results, closing up 4¢ at $29.91 yesterday.
The company’s fortunes hinge on coal prices, especially for metallurgical coal for Asian steel mills. Executives said they expect prices to firm up and shipments to increase, although year-over-year volumes were down 20% as of mid-April.
Despite continuing uncertainty due to the economy and rumoured terrorist attacks afflicting its industry, Fairmont Hotels upped its earnings guidance for analysts last month after a stronger than expected first quarter and a recovery in the industry.
Shares in Fairmont closed up 45¢ at $42.25 yesterday, a day after CIBC World markets cautioned in a weekly industry update that revenue per available room in the U.S. was down 7.8% for the week ended May 18 and that occupancy and rates were down 3.3% and 3.9%, respectively.
EnCana shares closed up $1.38 at $47.70 yesterday.
Although its shares have moved little since the merger, analysts say it has good properties, including those in Alberta and the Deep Panuke natural gas discovery offshore Nova Scotia.
Also, recent strengthening of gas prices are giving rise to optimism about better results.