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The two outfits plan to merge to form the No. 1 newsprint maker in an effort shave costs
Making paper for the news media has been tough lately. The rise of the Internet has dented demand for newsprint. Rivals in countries like China have rushed into the market with more supply of cheaply-made pulp. But the North American newsprint makers Abitibi-Consolidated (ABY) and Bowater (BOW) are fighting back. They announced an all-stock merger on Jan. 29 in an effort to form a new powerhouse in the industry and save themselves $250 million per year.
"This is a logical strategic step to address the realities of today's marketplace," said Bowater CEO David J. Paterson in a press release.
He and Abitibi-Consolidated's CEO John W. Weaver are going to call their new company AbitibiBowater and have it headquartered at the former's base in Montreal. They'll swap shares at an exchange ratio resulting in 48% of AbitibiBowater being owned by former Abitibi-Consolidated shareholders, and 52% of the new company being owned by former Bowater shareholders. Weaver will then become Executive Chairman of AbitibiBowater and Paterson the CEO. The AbitibiBowater Board of Directors will consist of 14 directors, seven from each former company.
The deal is supposed to happen by the third quarter of 2007. Once they combine forces, they hope to start axing away their overlapping costs in areas like production, sales, administration, distribution and procurement. Both already have experience at that one. Bowater, for example, has eliminated 340,000 tons of its highest-cost production in recent years, helping achieve more than $90 million in annual operating savings, according to Morningstar. On Dec. 14, 2005, Abitibi said it closed newsprint mills in Stephenville, Newfoundland and Kenora, Ontario.
As a team they'll get down to the business of selling newsprint, uncoated and coated mechanical papers, market pulp, and wood products. They'll own or operate 32 pulp and paper facilities and 35 wood product facilities located mainly in Eastern Canada and the Southeastern U.S. AbitibiBowater will also recycle newspapers and magazines, as it builds on both companies' efforts to come up environmentally-friendly production methods. They expect to be able to put out around 11.3 million tonnes of paper per year and about 3.1 billion board feet of lumber.
The new company will be incorporated in Delaware, but will apply to list its shares on the New York and Toronto stock exchanges.
"The combined company's ability to realize significant synergies will increase shareholder value, improve our financial flexibility and better position us to compete in today's increasingly competitive global marketplace," Weaver said in a press release.
Investors bid up Bowater's stock 23.9% to $27.44 per share on the New York Stock Exchange Jan. 29. Abitibi surged more than 26% in value to $3.33 per share.
Of course, more hurdles are ahead.
"Regulatory approvals could prove difficult to attain, as ABY and BOW are the top two newsprint producers in North America," said Standard & Poor's Corp. analyst Stuart Benway in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) Noting higher than expected cash flows, Benway upgraded Bowater to hold from sell and moved Abitibi's target price to $4 from $3 per share.