Case Notes/Answers
Canadian Pacific Ltd Unlocking Shareholder Value in a
Conglomerate By Michael King, Michael Zawalsky
Discussion Questions:
1. How has CPL evolved as a company? Why did a conglomerate structure make sense for CPL in the
past? Does it still make sense?
2. How are CPL’s businesses currently performing? Which one contributes the most to CPL’s sales
and net income? Which one is the most profitable? Which one is the riskiest?
3. How large is CPL’s conglomerate discount? How might it be measured?
4. What options was David O’Brien considering to address this conglomerate discount? How did
taxation affect the attractiveness of each of these options?
5. If CPL pursued the starburst strategy, how much of CPL’s corporate debt should be allocated to
each of the new companies?
6. What would be the implied price per share for each business in a spinoff?
7. As CEO of CPL, which strategy would you recommend and why?
, W14538
Teaching Note
CANADIAN PACIFIC LTD.: UNLOCKING SHAREHOLDER VALUE IN A
CONGLOMERATE
CASE SYNOPSIS
Canadian Pacific Ltd. (CPL) was a Canadian conglomerate that operated five companies in different
business segments: PanCanadian Energy (oil and gas), Canadian Pacific Rail (railway), CP Ships
(shipping), Canadian Pacific Hotels and Resorts (hotels), and Fording Coal (mining). At the time of the
case in mid-January 2001, CPL’s share price traded at a persistent discount of 12 per cent to 30 per cent
to a sum-of-parts valuation of the individual businesses.
Chief Executive Officer (CEO) David O’Brien must decide the best way to unlock shareholder value. His
options are: (1) to divest one or more companies, (2) to spin off and list one or more companies, or (3) to
spin off and list all five companies simultaneously. This final strategy is referred to by O’Brien and his
advisors as the “starburst strategy.” The status quo is not an attractive alternative, as CPL’s share price
has underperformed the market, and there is a risk that an activist investor may target the company.
TEACHING OBJECTIVES
1. To understand the merits and drawbacks of the conglomerate structure.
2. To illustrate how an asset restructuring, such as a corporate divestiture or a spinoff, can add
shareholder value to a company.
3. To learn how to value a company through sum-of-parts using trading multiples of comparable
companies.
4. To examine how taxes can affect corporate decision-making.
5. To discuss the importance of credit ratings and ratios.
This case can be used in an undergraduate business or MBA program in a variety of contexts, including
an advanced course on corporate finance, a course on investment banking, a course on valuation, or a
course on strategy. The case provides an introduction to the topic of corporate divestitures and spinoffs. It
This Teaching Note is authorized for use only by ELENA PIKULINA, University of British Columbia until Feb 2024. Copying or posting is an infringement of copyright.
or 617.783.7860.
Canadian Pacific Ltd Unlocking Shareholder Value in a
Conglomerate By Michael King, Michael Zawalsky
Discussion Questions:
1. How has CPL evolved as a company? Why did a conglomerate structure make sense for CPL in the
past? Does it still make sense?
2. How are CPL’s businesses currently performing? Which one contributes the most to CPL’s sales
and net income? Which one is the most profitable? Which one is the riskiest?
3. How large is CPL’s conglomerate discount? How might it be measured?
4. What options was David O’Brien considering to address this conglomerate discount? How did
taxation affect the attractiveness of each of these options?
5. If CPL pursued the starburst strategy, how much of CPL’s corporate debt should be allocated to
each of the new companies?
6. What would be the implied price per share for each business in a spinoff?
7. As CEO of CPL, which strategy would you recommend and why?
, W14538
Teaching Note
CANADIAN PACIFIC LTD.: UNLOCKING SHAREHOLDER VALUE IN A
CONGLOMERATE
CASE SYNOPSIS
Canadian Pacific Ltd. (CPL) was a Canadian conglomerate that operated five companies in different
business segments: PanCanadian Energy (oil and gas), Canadian Pacific Rail (railway), CP Ships
(shipping), Canadian Pacific Hotels and Resorts (hotels), and Fording Coal (mining). At the time of the
case in mid-January 2001, CPL’s share price traded at a persistent discount of 12 per cent to 30 per cent
to a sum-of-parts valuation of the individual businesses.
Chief Executive Officer (CEO) David O’Brien must decide the best way to unlock shareholder value. His
options are: (1) to divest one or more companies, (2) to spin off and list one or more companies, or (3) to
spin off and list all five companies simultaneously. This final strategy is referred to by O’Brien and his
advisors as the “starburst strategy.” The status quo is not an attractive alternative, as CPL’s share price
has underperformed the market, and there is a risk that an activist investor may target the company.
TEACHING OBJECTIVES
1. To understand the merits and drawbacks of the conglomerate structure.
2. To illustrate how an asset restructuring, such as a corporate divestiture or a spinoff, can add
shareholder value to a company.
3. To learn how to value a company through sum-of-parts using trading multiples of comparable
companies.
4. To examine how taxes can affect corporate decision-making.
5. To discuss the importance of credit ratings and ratios.
This case can be used in an undergraduate business or MBA program in a variety of contexts, including
an advanced course on corporate finance, a course on investment banking, a course on valuation, or a
course on strategy. The case provides an introduction to the topic of corporate divestitures and spinoffs. It
This Teaching Note is authorized for use only by ELENA PIKULINA, University of British Columbia until Feb 2024. Copying or posting is an infringement of copyright.
or 617.783.7860.
