Did Canadian Pacific overpay for DM&E purchase?
CP Rail deal to buy DM&E looks like takeover defence: analyst
After an investor’s conference in New York City this week, Canadian Pacific Railway Ltd.’s (CP/TSX, CP/NYSE) recent acquisition of Dakota, Minnesota & Eastern is increasingly looking like a move to fend of a takeover bid rather than creating shareholder value, according to John Larkin, an analyst at Stifel, Nicolaus & Company, Inc.
“The theory being that a strategic project absorbing virtually all free cash flow for the foreseeable future would semi-permanently repel all the financial buyers that had been lurking around,” he said in a note to clients.
The US$200-million CP expects in earnings before interest tax and amortization from the DM&E deal hardly justifies the US$1.48-billion price tag it agreed to pay, he said, or the extra US$1-billion in contingency payments it would owe if it decided to go ahead with its plan to expand into the coal-rich region of Wyoming’s Powder River Basin.
Many analysts complained at the time of the deal that CP had paid to high a premium and that stakeholders would have been better served through a share buyback program.
The rationale underpinning the DM&E purchase “was not fully clarified” in New York this week, Mr. Larkin said, adding that neither were CP’s plans for the Powder River Basin.
(More here.)
After an investor’s conference in New York City this week, Canadian Pacific Railway Ltd.’s (CP/TSX, CP/NYSE) recent acquisition of Dakota, Minnesota & Eastern is increasingly looking like a move to fend of a takeover bid rather than creating shareholder value, according to John Larkin, an analyst at Stifel, Nicolaus & Company, Inc.
“The theory being that a strategic project absorbing virtually all free cash flow for the foreseeable future would semi-permanently repel all the financial buyers that had been lurking around,” he said in a note to clients.
The US$200-million CP expects in earnings before interest tax and amortization from the DM&E deal hardly justifies the US$1.48-billion price tag it agreed to pay, he said, or the extra US$1-billion in contingency payments it would owe if it decided to go ahead with its plan to expand into the coal-rich region of Wyoming’s Powder River Basin.
Many analysts complained at the time of the deal that CP had paid to high a premium and that stakeholders would have been better served through a share buyback program.
The rationale underpinning the DM&E purchase “was not fully clarified” in New York this week, Mr. Larkin said, adding that neither were CP’s plans for the Powder River Basin.
(More here.)
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