Submitted by

Krishna Murari Choubey

MP17018

Canadian pacific Ltd: Unlocking shareholder value in conglomerate

Canadian pacific is into five main business:

1. Pan Canadian Petroleum Ltd(Pan Canadian)

2. Canadian Pacific Railway (CP Rail)
3. CP Ships
4. Canadian Pacific Hotels and Resorts
5. Fording Coal

Problem: The Canadian pacific is facing conglomerate discount. According to Saloman Smith Barney
Valuation CPL share price is $30 against estimated asset of 37.81. There is premium discount of 21
percent.

There are certain advantages and disadvantages of conglomerate:

Advantages:

Access to cheaper capital through internal capital markets; internal cashflow generated from
businesses can reduce cost of capital for other businesses.

More Efficient capital allocation: Management is more informed than investor

Diversified and resilient cash flow: The portfolio are more diverse and can withstand slow down and
cyclic setbacks.

Disadvantages:

Subsidization of poorly performing divisions: poor performing business get subsidized by cas flow of
good performing businesses

Managerial inefficiencies: Different management skills are required to run different industries

Poor analyst coverage: Analysts find it difficult to value conglomerate across various industries.

Options Available:
 1. Divest one or more businesses: Selling one or businesses will narrow focusses on the businesses
improve conglomerate value. But the half of the capital gain will be taxed at 42 percent.
2. Spin off one or more businesses: In this no actual sale will occur. CPL will issue stock for one of
the business. This will cause lowering of value of CPL but combined value will be higher. This
need approval from shareholders. This will take management time and corporate resources of
finance and legal. If denied then revenue Canada can ask for double tax rate if it is proved that
new entity was made to sell and get revenue.
3. Spin off all five businesses simultaneously: This was riskier or bold move as it was never done
before.

Calculation:

%
Company Revenue Asset Revenue %Asset EV/EBITA
CP Rail 3655.1 8758.4 22.1 36.8 7.7
CP Ships 3919 2608 23.7 11.0 5.8
CP Hotels 833.2 2461.5 5.0 10.3 7.9
Pan Canadian Petroleum 7215 8976.1 43.7 37.7 3.9
Fording 896 1004.2 5.4 4.2 8.3
16518.3 23808.2

E 9556
D 4032
EBITDA 4496.7
Expected price 6.1
Trading price
(E+D)/EBITDA 3.02

Expected price of conglomerate is 6.1X but it trading at 3.02 X. None of the individual company is lower
than this. This means every company is compensated due to conglomerate. Revenue wise this should
represent petroleum industry but that is also 3.9.

Therefore, all businesses should be spin off simultaneously as all are pulling each other.