I'm not surprised that CP said no, and yes the international flights are the most profitable. I expect that because of its affiliation with AA, the flights to the USA would remain, as they could be operated with narrow-body aircraft, and would not be subject to AC's offer.
As far as whether CP should or should not sell, I don't know. Their international routes are their ace in the hole. But I think CP is also faced with another issue. CP wants to be a major airline worldwide. Selling international routes would put an end to that. Also coming into play is their raison d'etre. As far as the government is concerned, their interest is to do with jobs and domestic (not international) competition. This is at odds with CP's interests. So think about that for a moment, about what all the airlines want. CP dreams of being #1. The government wants competition on domestic routes, and to save jobs. And AC wants international routes, but probably wouldn't mind CP staying around if they stay as only a national carrier, as it would solve alot of public relations problems, and accusations if AC were to have a monopoly.
So here's my solution. CP stays as a national carrier. For a cash sum, plus payments, AC would lease all international routes, and operate as code-share with CP. At the end of the lease, CP would have the right to resume its own service, sell the routes, or re-lease the routes. If CP folded, the routes would revert to AC. For aircraft, AC would take over the wide-bodies under a similar arrangement, with CP sub-leasing aircraft to AC, and in return perhaps a few A320's could be shifted to CP from AC for domestic service. Similar arrangements for CP employees and facilities. This way CP would back out of international routes until it returned to health, while having them provide some income, and much needed cash. If it were to return to service, AC would probably want to stay in, but would have to go back to petition for rights to fly those routes from the government.
Another solution could simply be to have one major carrier, and for competition have charters, regional carriers, and foreign competition on international routes.
One more thing. CP's rights to Amsterdam, Rome, Mexico, the South Pacific, and South America would be of interest to AC. That in addition to expanding their Asian service.