21 August 2007
Brookfield Abandons Plan to Buy CPR
The global credit crunch has forced Brookfield Asset Management
Inc. to quietly shelve a planned takeover of Canadian Pacific Railway Ltd. as funding for leveraged buyouts dries up.
CPR is one of a number of potential targets that have drifted out of the sights of private equity hunters, as banks scale back their
lending to these investors.
Investment banking sources say an acquisition of CPR that would have cost upwards of $15-billion is no longer feasible.
"Brookfield is telling banks that it may revisit [CPR] next year, but the file is dead for now," said one banker who works
with the Toronto-based company.
Buyers such as Brookfield boost returns on acquisitions by taking on a great deal of debt, and the banker said: "A [CPR]
buyout always depended on heavy leverage, so it doesn't make economic sense in this borrowing environment."
The steep drop in CPR's stock price shows that investors no longer anticipate a deal. Shares in the country's
second-largest railway spiked to $91 each in July, when the Calgary-based company confirmed it received, but
turned down, an overture from Brookfield. CPR stock has since fallen by almost a quarter.
"Takeover speculation fuelled a runup in [CPR's] price," analyst Avi Dalfen of Blackmont Capital said in a recent report. He
said investors should stop waiting for a deal, and instead focus on the railway's share buyback plans and its operating performance,
which is strong.
"Big leveraged buyouts are on ice right now, until credit markets get sorted out," said one investment banker who was working
on the CPR transaction earlier this year. Brookfield and CPR executives declined comment yesterday.
Private equity buyers have been seen as suitors for a number of large railways, in the wake of buyouts at several small networks last
year. Analysts predicted a CPR takeover would require at least $8-billion of borrowing.
CPR, with a market value of $10.8-billion, is the largest in a long list of Canadian companies whose stock prices have
fallen as takeover premiums leak out of the market.
While strategic buyers are still stepping up with offers - witness Marathon Oil Corp.'s friendly $5.8-billion bid this
month for Calgary-based Western Oil Sands Inc. - the pace of private equity deals is expected to drop.
Share prices for perceived private equity plays in a number of sectors have fallen this summer. They include companies such as
Consumers Waterheater Income Fund, Forzani Group Ltd., Husky Injection Molding Systems Ltd. and Davis + Henderson Income Fund.
Merrill Lynch recently warned investors to "discontinue their speculation regarding takeovers and leveraged buyouts." The
easy credit environment that fuelled takeovers has now passed. Financing for many recent deals is stalled as debt buyers such as hedge
funds demand higher rates, or simply refuse to buy new high-yield debt issues.
Investors who continue to bank on takeover premiums and leveraged buyout takeout values are "behaving as though the real economy
has no connection to the financial economy," Merrill Lynch's strategists said in a report. With lenders suddenly unwilling to
underwrite buyouts, the dealer said: "The probability of companies being taken out is plummeting, in our judgment."
CANADIAN PACIFIC RAILWAY
Close: $70.38, up 70 cents
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