Vancouver Sun
2007.01.30
Gordon Hamilton
Newsprint giants Abitibi-Consolidated Inc. and Bowater Inc. announced a cross-border merger Monday to create North America's largest newsprint producer, driving share prices of both companies up by 20 per cent.
The proposed deal also pushed West Coast producer Catalyst Paper's shares up more than 10 per cent as it became a target of speculation. But Monday's deal leaves the Vancouver-based niche market papermaker with few options to grow in an increasingly global paper industry.
"It takes one of the dance partners off the floor," said Salman Partners industry analyst Paul Quinn about the fallout for Catalyst. "Catalyst could be considered one of the ugly ducklings at the ball. Its dance card is empty."
The merger, a huge deal by Canadian standards, illustrates the relatively small size of Canadian forest companies in the global market. After the merger, the new company will have a market capitalization of about $3.5 billion, annual sales of $9.3 billion, operate 32 pulp and paper mills and 35 wood product facilities, yet rank only eighth largest in the world.
The new company, named AbitibiBowater Inc., is to be created through a share exchange that will result in 48 per cent of AbitibiBowater being owned by former shareholders of Montreal-based Abitibi-Consolidated and 52 per cent owned by former shareholders of Greenville, South Carolina-based Bowater. The head office is to be in Montreal with operating offices in Greenville. Both companies operated at a loss in 2006, hammered by plummeting newsprint prices.
Abitibi-Consolidated had been viewed as a potential partner for Catalyst, which operates four paper mills and one recycling plant in B.C., producing directory paper,newsprint and coated paper.
New York hedge fund Third Avenue Management, which holds a five per-cent stake in Abitibi, acquired 38 per cent of Catalyst late last year and quickly appointed four new directors to the board -- two with extensive backgrounds in mergers and acquisitions. Two weeks ago, Catalyst president Russell Horner and chief financial officer Ralph Leverton announced their resignations effective March 31, making way for a new management team that has yet to be named.
Neither Catalyst nor Third Avenue Management had any comment on the impact of the proposed Abitibi-Bowater merger.
It was no secret that capital market funds had been urging Catalyst to find a way to grow. The merger of the two Eastern companies limits that potential, but it will benefit Catalyst because it could lead to further rationalization within the industry.
"Catalyst shares are up nicely today so it is safe to say any consolidation is going to be good for the remaining players," said RBC Capital Markets analyst Mark Bishop. "But you can look at it from several viewpoints. Are they shut out from what could have been a potential combination in another fashion? What was done with Abitibi and Bowater is, in our view, the most logical and it certainly offers the best opportunity for synergies and rationalization of the industry back there. So Catalyst wasn't the best fit."
The Abitibi-Bowater merger still faces regulatory hurdles in Canada and the United States. Quinn said he expects newspaper publishers to fight the merger, likely claiming it concentrates too much of the North American newsprint market in the hands of one company.
And Communications, Energy and Paperworkers Union of Canada president Dave Coles said the merger should set off alarm bells.
"Our history with mergers and acquisitions has been that so called 'synergies' really mean more mill closures, job losses and devastation in our communities. We intend to meet with these companies to avoid a repeat of that history. We intend to fight for investment in the sector to save and expand jobs."
Both Bowater president David Paterson and Abitibi-Consolidated president John Weaver said that, subject to market conditions, the merger would not lead to mill closures.
Abitibi-Consolidated shares closed on the Toronto stock exchange up 83 cents at $3.94. Catalyst shares rose 48 cents, closing at $4.14.