Forestry industry consolidation continues apace with Abitibi-Bowater merger

The battered North American forestry industry is about to undergo another cross-border facelift as paper giants Abitibi-Consolidated Inc. (TSX:A) and Bowater Inc. (TSX:BWX) merge in an all-stock deal.

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Forestry industry consolidation continues apace with Abitibi-Bowater merger
Published: Monday, January 29, 2007 | 4:45 PM ET
Canadian Press: ROSS MAROWITS

MONTREAL (CP) - The battered North American forestry industry is about to undergo another cross-border facelift as paper giants Abitibi-Consolidated Inc. (TSX:A) and Bowater Inc. (TSX:BWX) merge in an all-stock deal to create North America's third-largest publicly traded paper and forest products company.

The combined company, to be called AbitibiBowater Inc. will have annual revenues of about $9.3 billion and be 48 per cent owned by former Abitibi-Consolidated shareholders and 52 per cent by former Bowater shareholders.

Caption: John Weaver, president and CEO of Abitibi-Consolidated. (CPimages '05/Ryan Remiorz) On the Toronto stock market, Abitibi shares surged more than 25 per cent to $3.89, with 41.8 million shares changing hands. On the New York Stock Exchange, Bowater stock rose $5.04 to US$27.19.

Based on Monday's trading prices, the two companies would have an estimated combined market capitalization of about C$3.5 billion.

The deal continues a wave of consolidation in the forestry sector as companies try to get bigger to deal with increased competition and to cut an increase in operating costs due to higher fuel, transportation and raw material costs and the rising Canadian dollar.

For example, Montreal-based Domtar (TSX:DTC) is expected to soon close a $3.3-billion deal to muscle up its operations by merging with the fine paper division of U.S.-based Weyerhaeuser, one of the world's largest forestry companies.

Abitibi and Bowater are hoping for the same type of growth potential from their deal.

"Both companies are looking for ways to move to the next plateau, somewhere that we can't get independently and we feel that by putting this merger together we can deliver significant synergies to the bottom line and increase the financial flexibility of both companies through a stronger operating base and provide customer quality and service," John Weaver, CEO of Abitibi-Consolidated, said in an interview.

The marriage of Abitibi and Bowater is just the latest move in a tectonic shift that sees North America forestry players jostling to grow and compete with the rest of the world, said Bowater president and CEO David Paterson, who will move to Montreal to head the new corporate entity.

"This is a continuation of what I see as a long-term trend of a globalization of the market, that North American companies have to be able to compete with Asian, South American and European producers and they have to do that from a low-cost platform and that's what we're trying to create here."

Other companies in the sector immediately became targets of speculation that there's more to come in the days ahead - Catalyst Paper Corp. (TSX:CTL) chief among them, its shares surging 48 cents or 13 per cent to $4.14 on the TSX.

Earlier this month, the two top executives at the Vancouver company resigned, clearing the way for hedge fund and major shareholder Third Avenue Management LLC to install its own people to run and possibly restructure one of Canada's biggest pulp and paper producers.

The Abitibi-Bowater union is expected to generate $250 million in synergies that will transform the new company into a profitable business after each company reported losses.

Abitibi and Bowater lost $350 million and US$120.6 million respectively in 2005, and $48 million and US$16 million in the third quarter of 2006.

"If we fully implement $250 million of synergies across our systems, yes I believe we're back in black," Paterson said at a news conference.

"Those synergies are based on reductions in costs throughout the system but not predicated on any mill closures."

The merger is expected to close in the fall, after receiving approval from competition regulators in Canada and the United States.

"We feel that this deal makes a lot of sense and will pass the regulatory rules," said Paterson, who received a Montreal Canadiens jersey from Weaver.

The consolidation was well-received by analysts but viewed skeptically by forestry unions.

"I think it's of tremendous benefit to the industry," said Anna Torman of Soleil Securities in New York.

She said the merger does three things: paves to way for price increases by changing the balance between producers and publishers, removes capacity in the marketplace by converting to different grades of paper and improves the cost position of the companies.

It's unlikely to be the final word on industry consolidations, she added.

"I think that there is still significant room for consolidation in the industry and clearly it helps to create a much stronger environment."

Potential consolidations have been foreseen for a couple of years, especially since the Canadian dollar strengthened in 2002, said Pierre Lacroix of Desjardins Securities.

"We are looking at the market to continue to have pressure in the medium to long-term on the demand side," he said.

"Based on that assumption you need to reduce capacity, to reduce production, to have some kind of equilibrium in the market."

This will likely now come in the form of asset swaps and joint ventures, rather than in company-wide mergers, he added.

The head of Canada's largest union of forestry workers said he fears the merger and its drive for synergies will ultimately lead to more mill closures and job losses that have devastated forest communities across the country.

"There are many issues underlying this announced merger which should raise alarm bells in Ottawa," union president Dave Coles said in a statement.

"Our forest based industries and communities are already in crisis with the loss of some 10,000 jobs over the past few years."

He called upon Prime Minister Stephen Harper to convene a national summit on the future of the forestry sector.

The merger was first broached during a meeting last May after Paterson took over Bowater, but negotiations didn't begin until the fall.

Under terms of the transaction, each common share of Abitibi-Consolidated would be exchanged for 0.06261 of a common share of AbitibiBowater, and each Bowater share would be exchanged for 0.52 of a share of AbitibiBowater.

The new company's 57.4 million shares will be traded on the Toronto and New York stock exchanges. But as a corporate entity registered in Delaware, it won't be listed on the S&P/TSX Composite Index.

Additional Information

Web Site: http://www.cbc.ca/cp/business/070129/b012977A.html

Category: Forestry>Industry Trends

Region: Worldwide

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