25 April 2007
CP Rail Share Buyback Seen as Warn to Raiders
For seven long years, investment bankers have been waiting for
their train to arrive on railway takeovers. The private equity funds may finally be the catalyst for a deal.
Consolidation among North America's six major railways stopped in its tracks - that's the last pun - back in 2000 when regulators
blocked the proposed $6-billion merger proposed of Canadian National Railway and Burlington Northern Santa Fe. The
networks fit perfectly, but U.S. Surface Transportation intervened, imposing a 15-month moratorium on all mergers. That
regulatory time out expired years ago, but no railway has since stepped up.
Anyone with a map can figure out which companies belong together. CN and Burlington Northern still creates an
ocean-to-ocean-to-ocean powerhouse, as does a combination of Canadian Pacific Railway and Union Pacific. But to date, no
one has moved. What if one of these players saw the perfect partner slipping away?
For months, there has been speculation that the strong cash generation and predictable nature of the railways had drawn the attention
of U.S. private equity funds. Yesterday, CP Rail gave credence to those buyout rumours - which would put an enterprise values of
$14-billion on the company - by rolling out an extremely aggressive share buyback plan.
CP Rail announced plans to buy back up to 10 percent of its stock, or 15.5 million shares. The program would end up costing more
than $1-billion, and CIBC World Markets analyst Jacob Bout calculates the company will take on $475-million
in new debt to fund the repurchase.
Returning cash to the owners is shareholder friendly, but it's also a defensive move by the railway.
"The buyback is likely to fend off a potential leveraged buyout, as this would reduce the three-year IRR (internal
rate of return) from 9.1 percent to 5.4 percent," said Mr. Bout, who ran various buyout scenarios in a report released today.
For those who enjoy conspiracies, and who doesn't, here's another take on the speculation surrounding CP Rail. The line between private
equity funds and activist hedge funds has been blurred in recent years.
There's a certain type of investor - think Carl Icahn - that would take a large position in a rail and propose taking it private. Such
a move would force the strategic players - think Union Pacific - to make a pre-emptive bid. Such tactics worked wonders
for Mr. Icahn at Fairmont Hotels & Resorts, another arm of the old CP conglomerate.
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