Canadian Pacific Rail

3. The measurement of conglomerate discount

The conglomerate discount we estimate is 35.5%. Generally, we estimate the enterprise value by using price multiple valuation, then we adjust the enterprise value to get the equity value because the share price is the equity value divided by the number of common shares. Then compare the total asset value with the market value of CPL as a whole company to calculate this discount.

Since from the information given in the case, it would be hard for us to obtain the individual business operating condition from the 2000 in the future to apply the discounted cash flow model. Therefore, indicated from exhibit 7, we can first obtain the median valuation multiples based on the comparable companies and market multiples by business given. Then, from exhibit 6, we know the individual business segment’s operating performance, obtaining the EBITDA of each business in 2000. Thirdly, multiply EBITDA with EV/EBITDA to get the individual business’s enterprise value. We assume that the share price is calculated by the equity value of the business. The equity value by definition equals the total market capitalization plus preferred shares plus the market value of debt plus any minority interest minus cash and cash equivalents. Based on the information given in the case, we estimate the equity value by deducting book value of debt and minority interest from the enterprise value calculated.

The conglomerate discount is the difference between the total assets value and estimated market value of CPL divided by the total assets value. Besides the individual share price value estimated, the cash is obtained in the balance sheet of the whole company and the other real estate value is referred by other activities value in exhibit 6. Finally, we divide the businesses’ equity value, cash and other real estate by the number of common shares of CPL in 2000 and then calculate the conglomerate discount of 35.5%.