The science behind the break-up of one of Canada's national legacies.
When a huge conglomerate with national roots decides to break into five separate companies, IROs have a lot of ground to cover with shareholders. Such was the case when Canadian Pacific, a company founded in 1881 to build Canada's transcontinental railway, spun-off its five subsidiaries. From the time the reorganization was announced in February 2001 to the actual spin-off at the end of September, CP's IR department was busy communicating the details of the transaction to shareholders and analysts.
In the end, the break-up was smooth. Canadian Pacific Railway (CPR), Canadian Pacific Ships Holdings, Fording, PanCanadian Energy and Fairmont Hotels & Resorts - Canadian Pacific's former holdings - entered the public markets on September 26, 2001, and began trading at prices that met both analysts' and management's expectations. From an IR standpoint, the road to listing all five companies simultaneously was an exercise in coordination, and according to some analysts, not always a successful one.
Clearly the difference between this transaction and an IPO is that all five operating companies already had shareholders in the form of CP investors - they were simply trying to hold on to them. Before the break-up, PanCanadian Energy (formerly PanCanadian Petroleum) was the only one of Canadian Pacific's holdings with a small public float (CP owned 85 percent of PanCanadian's shares and the other 15 percent was in the hands of outside shareholders). The other subsidiaries were 100 percent owned by Canadian Pacific. Under the reorganization, shareholders of
CP common shares were allotted a portion of all five newly public companies.
The reason behind the break-up had to do with liquidity and timing. 'Each of the five companies had been undergoing changes over the last five years and were well positioned to take advantage of the opportunities ahead of them,' explains
Chris Francis, former IR manager at CP and now IR manager for CPR.
Another reason was that the operating companies should achieve better valuation as pure-play companies. For its part, the Street had for years been cheering for the spin-off of PanCanadian Energy, one of Canada's largest gas and oil producers. 'Getting an 85 percent shareholder out definitely solves the problem of liquidity for PanCanadian,' comments Jill Angevine, an analyst with FirstEnergy Capital in Calgary.
Inside & out
The simplicity of the rationale behind the reorganization belies the complexity of a major transaction. 'We had a very hectic schedule making sure we were responding to the inquiries of the investment community while at the same time educating the operating companies about what it means to be public,' summarizes Sheila McIntosh, vice president of IR at PanCanadian Energy and former vice president of corporate communications and investor relations at CP.
For the first few months following the February 2001 announcement, CP's IR team was the central point of contact for investors while the other companies organized their IR departments. CP set up a special section on its web site about the reorganization where all press releases related to the spin-offs were posted. Once all CP's subsidiaries had their IR departments set up, shareholder communications were coordinated by a working committee that included CP's investor relations department and IR representatives from all five companies. 'We had teleconferences regularly to talk about who we were meeting with in order to make sure we were not tripping over each other and overbearing investors,' says Paul Bell, vice president of IR for CPR.
While North American shareholders were well acquainted with CP's crown jewels - CPR, PanCanadian Energy, Fairmont Hotels & Resorts - the conglomerate's smaller companies, namely Canadian Pacific Ships Holdings and Fording, were not as well understood by the Street. There was some concern on CP's part that investors would dump their holdings in Fording and Canadian Pacific Ships Holdings once the spin-off went through. In the years prior to the reorganization announcement, McIntosh says, CP made an effort to teach investors about CP's smaller holdings. 'We started doing an annual field trip for the management teams from all of CP's holdings to present their companies to investors,' she says.
Apples & apples
From an investor standpoint, the main issue with the smaller companies was comparability. Fording is one of a handful of export-coal producers in North America, which made it difficult for investors to compare the company to peers that were already trading publicly. In the case of Canadian Pacific Ships, 'There simply aren't that many publicly traded and profitable container shipping companies out there that the North American investment community follows,' explains McIntosh. The solution was to have all five subsidiaries go out on the road to meet investors and educate them about their individual businesses.
From May to September, all of CP's parting companies embarked on aggressive roadshow schedules, hitting cities in Canada, the US and Europe. 'Over 70 events, speaking to 160 clients and over 320 people in 15 cities takes a lot out of you physically,' asserts CPR's Bell. Having been on their own for a while, the management teams from PanCanadian Energy, Fording, CPR, Canadian Pacific Ships Holdings and Fairmont Hotel & Resorts had their first taste of what it would be like to be out from under the protective wing of a large conglomerate.
The predominant question mark among analysts and investors was how vulnerable CP's holdings would be to takeover following the spin-off. In the months prior to the reorganization, there was speculation in the Canadian press that CP's shining stars, CPR and PanCanadian Energy, would be ripe for takeover by a US company after the spin-off. Both companies are large by Canadian standards but small on the global scale.
The question of mergers and acquisitions was very much on the minds of investors and analysts, affirms CPR's Bell. 'Our answer to that question was that we believe an alliance and partnership strategy makes more sense than a merger,' says Bell. For the last three years, CPR has worked hard at forming partnerships and working relationships with US-based railways. Regulatory hurdles in the US and Canada would also make it difficult for a US company or a Canadian rival like Canadian National Railway to acquire CPR.
End of the umbrella
The takeover threat was not so important for analysts and investors looking at PanCanadian Energy, notes McIntosh. 'Obviously, without the CP umbrella in place, there is the possibility of a takeover but this was not the main concern from the investor's standpoint,' she says.
For all of the operating companies, the burning question from analysts and investors was how the spin-offs would be financed. Securities analysts were most interested in hearing about what the capital structure would be for each of the individual companies, notes Chris Francis, IR manager for CPR. They also wanted to know how CP's 315 mn shares were going to be distributed, including 8.8 mn preferred shares. And there were questions about how debt would be restructured as well as how the individual companies would measure up to their industry peers. According to McIntosh, investors and analysts were eager to be updated on key milestones in the reorganization process including court approval proceedings and tax rulings.
In the eight months leading up to the spin-off, details of the transaction were communicated to the subsidiaries as they were decided by CP's management team. 'Whenever CP came up with a definite payment structure from one company to another we put out a press release,' recalls CPR's Paul Bell. The proposed financing of the transaction was disclosed in the arrangement circular that was sent to shareholders on August 21. On the same day, the five companies began trading on a when-issued basis on the TSE and the NYSE. Then on September 26, 2001 shareholders voted on and unanimously approved the reorganization plan and the stocks began trading publicly.
The fact that CP controlled the content and flow of information frustrated some analysts covering PanCanadian Energy. 'With CP running the show, PanCanadian Energy was less up-front,' says FirstEnergy Capital's Angevine. While communications from Pan-Canadian Energy were frequent, they could have been more disclosure oriented, agrees Brian Prokop of Peters & Co in Calgary. 'A lot of times it was more fanfare than information,' he says.
Controlling parent
Angevine had the impression that PanCanadian Energy's management did not want to do any presentations that weren't controlled by CP. Last February, PanCanadian Energy canceled an analysts' day in Calgary at the last minute and rescheduled it for four months later in Toronto, according to Angevine. 'My feeling was the IR department on the CP side looked at PanCanadian's competitors' presentations and realized they needed to do more work to beef up theirs,' she says.
These analysts think CP acted like an overbearing parent during the reorganization process. Their feelings were reinforced two weeks after the companies listed when David Tuer, PanCanadian Energy's longtime CEO and president, resigned suddenly and CP's former management stepped in. Michael Grandin, formerly CP's CFO, became president of PanCanadian Energy and David O'Brien became CEO and chairman of PanCanadian Energy. O'Brien had been CEO and president of CP prior to the break-up.
The announcement of Tuer's departure was badly handled in the eyes of onlookers. On October 14, 2001, PanCanadian Energy issued a press release saying Tuer had stepped down for personal reasons and gave no further details. 'That press release was so unlike what PanCanadian had been trying to do all year in beefing up their IR efforts,' says Angevine. 'This definitely created negative sentiments and uncertainty in the market.' PanCanadian Energy's stock had been trading as high as $52 during the reorganization process but was now down around $40.
In the days following the announcement of his resignation, Tuer told the press his decision was not related to health or family concerns. 'There seemed to have been a falling out between Tuer and the board,' says Brian Prokop of Peters & Co. 'The suggestion was that the board wanted to split the roles of CEO and president and Tuer did not take kindly to that.' Prokop agrees that PanCanadian Energy's IR department committed an IR blunder by not disclosing the reasons behind Tuer's resignation.
'They should have come out and said it was because of a disagreement with the board and then thanked Tuer for his effort and commitment over the years.'
Growing pains
The mishandling of Tuer's resignation is evidence of the IR growing pains a company can experience when it's released from its protective parent organization, according to Prokop. 'Up until now, PanCanadian Energy's management team really hasn't had to perform for the Street; they had to perform for the CP Board,' he says. 'Now they have to learn that the most important thing for analysts is trust in management.'
That these analysts think PanCanadian Energy stumbled so soon after its parent company disbanded reveals the second stage in the story of CP's splintering. With all five companies now trading successfully on the NYSE and the TSE, their respective IR departments now face the real challenge of establishing reputations of their own with investors and analysts.
IROs from all five of CP's former holdings continue to communicate on a regular basis. 'We have our own IR forum to share our views on different IR practices,' says McIntosh. 'The new IR professionals inside CP's former operating companies still call me with questions about best practices and how we can do our jobs better.'
Unfortunately, all of these companies went public at a time of great uncertainty and mistrust in the market which makes
it difficult to gain visibility and credibility with shareholders. However, if the overall success of the spin-offs is any indication, these five companies will continue to build on the momentum and establish strong track records with investors worldwide.