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Canadian corporate breakups - who's a candidate?

JENNIFER ROBERTS/jennifer roberts The Globe and Mail

Breaking up isn't that hard to do, as Kraft Foods Inc. and ConocoPhillips are proving with their plans to split their businesses to form two new companies each. So who in Canada is a candidate to divide?

Bankers in Canada are musing about applying the Conoco model to local energy producers like Talisman Energy, Cenovus and Nexen. There's perennial candidate Maple Leaf Foods, which could split off its bakery business from its meat, and a few more. Read on.

Energy Producers: The Conoco plan is to divide into two purer plays, one "upstream" (exploration and production) and one "downstream" (everything in the production process after that, including refining and marketing). Once upon a time, investors liked to have companies with both legs of that stool, because it created a more stable business through the ups and downs of the energy cycle, even though there's a school of thought that there's no real synergies between owning a well and a refinery or marketing business.

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Splitting upstream and downstream is a higher volatility model, but there's a view that investors these days are okay with that, now that oil seems to be camped near $100 no matter what happens. Companies like Nexen , Cenovus and Talisman are candidates. Stage two could be a wave of consolidation between upstream companies and downstream, where "you'd get some real synergies," said one banker. Not too mention fees for bankers.

HudBay Minerals: HudBayhas both base and precious metals production, so it might make sense to split the two so that investors can pick and choose which side of the company they want to invest in. The two businesses can attract very different investor sets, and very different valuations as precious metals businesses often trade at a premium. HudBay has mused about the possibility.

Maple Leaf Foods: Maple Leaf has two sides to its business, producing meat products as well as producing bakery products from its Canada Bread operations. Maple Leaf has argued that there's a synergy there, for example because it can pitch customers on whole products (they won't just sell you the ham, they will sell you the whole premade ham sandwich).

Some investors are skeptical, believing there's more value in splitting the company. The idea got a lot of thought back when Maple Leaf was in a fight with some dissident shareholders. A National Bank of Canada analyst suggested that breaking up the company into two parts and selling them could generate more than $16 for shareholders. The company and the shareholders have since made nice, but if returns at Maple Leaf don't live up to expectations, expect the thought to surface again.

Fortis Inc.: Fortis , a darling of dividend-seeking investors, is best known as a utility operator. But it has a sideline as a landlord and a hotelier. Which raises the question, why? It's hard to see the tie-in between producing power and running a Holiday Inn in Kelowna, and one wonders how many people who buy Fortis stock for the utility business even know they own a bunch of hotels.

Loblaw Cos.: The grocer owns a lot of real estate and there has long been an idea of splitting it off into a real estate investment trust that would own the actual grocery stores. The operating company could then rent them. Why bother? The structure would help shelter some income tax, and would appeal to yield hungry investors. Loblaw used to be a dividend stock, but it's really lost that status and the valuation that goes with it. This could be a way to get it back.

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