26 July 2006
CPR Chief Pooh-Poohs Takeover Rumours
Canadian Pacific Railway Ltd.'s best defence against any potential
hostile suitor will be maintaining a streak of higher profit and lower operating costs, says the company's chief executive officer.
Fred Green, who took over the top job in April, said Tuesday that he's aware of recurring rumours that Calgary-based CPR
is a takeover target. Some CPR employees, anxious about takeover speculation, recently circulated internally by e-mail a
portrait of a beaver, representing CPR, sitting on the blue-topped, red-striped logo of Union Pacific Corp. of
Omaha.
Besides Union Pacific, Norfolk Southern Corp. of Norfolk, Va., is frequently mentioned as a possible bidder for CPR.
"The best thing we can do is to operate this railway as efficiently as we possibly can," Mr. Green said in an interview after
CPR announced that its second-quarter profit tripled to $377.5-million or $2.36 a share. That compares with
$123.2-million or 77 cents a year earlier. Revenue climbed 2.3 percent to $1.13-billion.
CPR shares rose $1.61, or 3 percent, to $55.60 Tuesday on the Toronto Stock Exchange. More than 1.3 million shares traded hands, or
double the average daily volume.
Mr. Green also said that even if an unwelcome bidder emerges, there are high obstacles to clear in the form of regulatory approvals
required from the U.S. Surface Transportation Board (STB).
"I would just advise that people need to be aware that there are a set of regulatory requirements, introduced through the STB, that
will not make consolidation a simple and easy undertaking. It doesn't mean it can't be done or won't be done, but there are
hurdles," said Mr. Green, who replaced the retiring Robert Ritchie as CPR's CEO.
The STB requires that any merging parties prove to shippers that a combined entity would benefit rail customers. For the most part,
however, the shippers have been wary of rail consolidation for fear of reduced service and increased freight charges.
Walter Spracklin, an analyst with RBC Dominion Securities Inc., declined to comment Tuesday on the probability of CPR becoming prey, but
he calculated that if a takeover bid were to be made, the price could be as high as $75 a share. In theory, CPR could convert itself
into an income trust, but that would fetch less money - $70 a share, Mr. Spracklin estimated.
He pointed out that the carrier, the country's second-largest after Montreal-based Canadian National Railway
Co., has improved in productivity categories such as locomotive speed and time spent getting trains ready in rail yards, also known as
"terminal dwell time."
CPR's average train speeds climbed 14 percent to 40 kilometres an hour in the second quarter from the year-earlier period.
Terminal dwell time dropped 26 percent to 20.2 hours.
The company's latest profit included a $176-million tax gain and also $58-million from favourable exchange
rates on long-term debt. Excluding one-time items, CPR's second-quarter profit slightly surpassed
analysts' expectations.
CPR's operating ratio - a key indicator of productivity that measures operating costs as a percentage of revenue - improved to 75.1
percent from 75.5 percent. The lower the ratio, the better.
Second-quarter revenue from transporting grain and consumer products rose, but coal and potash shipments slipped. "If
coal and potash recover, as we expect they will, then CPR is poised to benefit tremendously from that kind of rebound," Mr.
Spracklin said.
CPR executives are anticipating a busy second half, helped by Alberta's booming economy, strong commodity prices and a trade bonanza
with Asia.
Mr. Green estimated that the railway's Canadian retail customers now stock almost half of their shelves with goods from Asia, led by
China, with room to grow to perhaps 60 percent over the next few years. That would be up sharply from roughly 35 percent in
2003.
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