19 July 2007
A Rail Suitor for CP Said Unlikely
If Canadian Pacific Railway shareholders want alternatives to a
possible bid by Brookfield Asset Management Inc. they should not expect the white knight to arrive by rail, analysts and a rail
industry executive said on Thursday.
CP's shares closed down 29 cents at $88.71 in Toronto on Thursday, a day after they shot up about 16 percent on news that Brookfield
had approached the railway about a possible takeover. CP said it rebuffed the approach, but acknowledged it had received other
inquiries.
UBS analysts cautioned investors not to hold their breath waiting for another large North American railway to step up with a takeover
proposal, saying any deal would likely face major regulatory hurdles that would limit the financial incentives to a potential buyer.
"Shippers are likely to take issue with this as they have already expressed their view that the Class 1 Rails currently possess
too much pricing power," the UBS analysts said in a lengthy note to investors on Canada's second-largest railway.
The North American market is dominated by six carriers, referred to as the Class 1 railroads. They are Union Pacific Corp., Burlington
Northern Santa Fe Corp., CSX Corp., Norfolk Southern Corp., Canadian National Railway Co., and Canadian Pacific.
Union Pacific already co-ordinates some freight traffic with CP in the U.S. Pacific Northwest, and has been mentioned as a
potential suitor. But UP's chief executive, Jim Young, said the railway was not interested in further industry consolidation.
"We don't believe consolidation makes sense in our industry," Young told analysts in a conference call on the company's
second-quarter financial results. "If private equity comes into the CP, my interest will be their ability to work
with us to grow. Can they put capital in and provide the service?"
Canadian Pacific also co-ordinates freight operations in the eastern United States with Norfolk Southern. A spokesman for
the U.S. carrier said he was unaware of any discussions, about CP, but even if there had been the company would not comment.
Brookfield has not officially said if it is still interested in CP, and some analysts have suggested that Wednesday's share price jump
made an offer less attractive.
A spokesman for the company, which has interests in real estate, power generation, and forestry, declined comment.
CP maintains a 21,700-km (13.600-mile) network of tracks in Canada and in the United States, and the UBS
report warned it could be difficult any non-rail group to mount a leveraged buyout with the idea of splitting up the
company into operating and infrastructure units.
"This has never been done with a major North American railroad, hence the regulators would need to rewrite the rulebook,"
analysts Fadi Chamoun, Rick Paterson, and Tasneem Azim wrote in the report.
|
