Merger boosts Abitibi

For the second time in five months, a major Canadian firm and a U.S. forestry company have agreed to merge in an attempt to gird against falling demand and the impact of the high Canadian dollar -- at the cost of a presence on Canadian stock indexes.

But yesterday's "merger of equals" between North America's two largest newsprint producers, Montreal's Abitibi-Consolidated Inc. and Greenville, S.C.-based Bowater Inc. also met with enthusiastic investor response.

Their stocks shot up more than 30% in heavy trading on hopes the deal could bring relief to the beleaguered newsprint industry, the poorest performing sector of the forestry and paper products sector this decade. Abitibi shares closed up 27% at $4.10. Bowater closed up 24%.
"The deal makes sense," said Salman Partners analyst Paul Quinn in Vancouver. "They are both ships that are sinking. The combination allows them to plug a few holes and allow the boat to go down a bit slower."

Abitibi last reported a profitable year in 2003, and Bowater in 2001.

Both have led consolidation of the industry in the past decade, with little to show for it.

Abitibi stock is 80% off its peak in 2000; Bowater is down more than 50%.

"We will be better-positioned for success than either company would be on its own," said Abitibi chief executive John Weaver.

Under the proposed terms, Abitibi investors will get 6.3 shares in "Abitibi Bowater," the new firm, for every 100 they own. Bowater shareholders will get 52 shares.

The all-share deal carries no premium. "I don't think either side could afford to pay a premium, from a balance sheet point of view," Bowater chief executive David Paterson said.

Abitibi and Bowater investors will end up with 48% and 52%, respectively, of equity in the new company, which will have annual revenue of US$7.9-billion and US$1.1-billion operating profit.

With 32 mills mostly in eastern Canada and the southeastern United States, it will be the third-largest public forestry products company in North America and eighth in the world. The company will derive 48% of sales from newsprint and have a market share of about 50% of the commodity in North America. It will have close to half the share of the market for the paper used to make newspaper flyers.

For that reason, the deal could run afoul of competition regulators, Mr. Quinn said.

"It will be a very long, vocal discussion around the competition issues, with newsprint customers saying, 'Wait a second.' "

The head office will stay in Montreal and Mr. Weaver will become executive chairman.

Mr. Paterson -- who initiated talks after joining Bowater last May -- will move to Montreal and be CEO.

The arrangement echoes the proposed merger between photocopy paper maker Domtar Inc. and a unit of Weyerhaeuser Co., announced last August. Both cross-border firms will become U.S. registered companies and be disqualified from being included on Canadian stock indexes.

The Abitibi-Bowater deal comes amid a period of prolonged weakness for North American newsprint firms, and will create not so much a strong industry giant as a "last-man standing," a grim position that may benefit it as weaker rivals fail.

Newsprint makers have been hammered by a steady decline in demand in the U.S. and, to a lesser extent, in Canada this decade as newspaper readers turn increasingly to the Internet for their news.

Newspapers have struggled as publishers have tried to trim paper usage. as Dow Jones & Co. did recently by narrowing the size of the Wall Street Journal. U.S. demand fell 7% in 2006.

High energy prices and a buoyant loonie have also wreaked havoc on Canada's newsprint makers, which export 72% of the product to the U.S. And they face new rivals from Asia and South America.

As a result, domestic newsprint makers have had to shut plants and idle machines to match supply and demand. Led by Abitibi and Bowater, the industry has managed to keep pace, even driving the price of newsprint up 50% from a near- 30-year, inflation-adjusted trough in 2002. But prices are forecast to decline about US$35 to US$630 per tonne this year, and another three mills will have to close in 2007 just to keep up with the drop in demand, Daryl Swetlishoff, an analyst with Raymond James in Vancouver said. "It's fair to say with that kind of demand destruction somebody will have to take mills down."

In that environment, Abitibi Bowater will be better able to cope as its larger size and scale allow it to more easily sustain cuts and closures, he said. "It's hard to see Abitibi or Bowater being worse off after a deal like this," he said. "There is an element of first-mover advantage here."

Mr. Weaver and Mr. Paterson avoided the topic of closures, saying they could achieve annual cost savings of US$250-million just by combining their existing operations.

But Craig Campbell, Canadian leader of PricewaterhouseCoopers' forest and paper practice in Vancouver, said "they'll be taking a very hard look at their portfolio of mills. If demand continues to decline they'll have to address that."

The Communications, Energy and Paperworkers Union of Canada said in a release the deal "should raise "alarm bells" in Ottawa over the prospect of job cuts.
source:www.canada.com