Canada’s Abitibi-Consolidated Inc. and Bowater Inc. of South Carolina said Monday they will combine in an all-stock deal that their CEOs said should create a more powerful global competitor despite a declining U.S. newsprint market.
The combined company would be known as AbitibiBowater Inc. and would have annual revenues of about $7.9 billion and a market capitalization of about $2.4 billion.
The combined company should be able to cut annual costs by about $250 million as a result of efficiency in areas such as production, selling, general and administrative costs, distribution and procurement, the companies said.
“In order to strengthen both of our companies, this deal brings us both together and moves us to the next plateau” with a better mix of products and cutting costs, Abitibi Chief Executive John W. Weaver said.
Bowater CEO David J. Paterson said in an interview he and Weaver have been working on the deal for about three months. He said he and Weaver got to know each other shortly after he took his job at Bowater in May. Both companies were looking at “options for growth,” he said.
“We did our homework. We did our due diligence,” Paterson said. “We felt this was the right one to pursue.”
Weaver will become the executive chairman of AbitibiBowater and Paterson will serve as president and CEO.
AbitibiBowater’s product lines will include newsprint, uncoated and coated mechanical papers, market pulp and wood products. It will also be one of the world’s leading consumers of recycled newspapers and magazines.
The combined company will own or operate 32 pulp and paper facilities and 35 wood product facilities located mainly in eastern Canada and the southeastern U.S.
The companies said it will be the third largest paper and forest products company in North America.
Paterson said the anticipated savings “are not predicated on any mill closures.”
“It buys them time,” Kevin Mason, an analyst with Equity Research Associates, in Vancouver, British Columbia, said.
But the “broad structural issues in the industry are still the same,” Mason said. The companies may be stronger merged, but the industry’s woes continue: too much capacity, declining newspaper newsprint consumption and growing threat of competition from China.
The companies supply newsprint to some of the nation’s largest newspaper publishers, including the Tribune Co., New York Times Co. and Washington Post Co.
But the newsprint industry has lost business as circulation and advertising volume decline. Also some newspapers have cut newsprint by eliminating stock listings, said Pablo Conde, vice president of the Newsprint Producers Association.
In their third-quarter financial reports, Bowater and Abitibi told investors newsprint consumption in the United States was down 7.9 percent. Bowater noted it was reducing production at an Ontario facility, a tack Conde said the industry has taken to deal with having too much capacity.
Since 1999, newsprint production has fallen by more than 3.3 million tons, Conde said.
The industry has been closing mills and merging and more of that is expected, said newspaper industry analyst John Morton.
The deal Monday likely means there will be “a lot of consolidation and probably some plant closings,” Morton said.
The companies said the combined company would be “operationally and financially stronger” and could compete better globally while adapting to lower demand for newsprint in North America.
Shares of both companies soared on the news. Bowater shares climbed $5.20, or 24 percent, to close at $27.44 in trading on the New York Stock Exchange, while Abitibi’s U.S. shares rose 69 cents, or 26 percent, to close at $3.33.
The deal allows the companies to reduce costs and gain financial flexibility, Paterson said.
The company will be based in Montreal, Quebec, where Abitibi is currently based, with a U.S. regional manufacturing and sales office in Greenville, current site of Bowater headquarters.
Paterson said to expect some layoffs in Greenville, but he didn’t say how many.
In 2005, Bowater had 8,000 employees. Abitibi had 13,500 workers.
Weaver and Paterson said they’ll immediately begin working with regulators in the United States and Canada for a review of the deal.
“We expect a full and vigorous regulatory review and we have prepared for that,” Paterson said. “We feel confident that we can comply with the antitrust regulations of both countries.”
The combined AbitibiBowater will have about $6.2 billion in debt. Weaver and Paterson said the savings and continued forest land sales will help reduce that.
Abitibi shareholders will get 0.06261 common share of the combined company for their shares, and Bowater shareholders will get 0.52 common share for theirs. The resulting mix will leave 48 percent of shares in the hands of former Abitibi-Consolidated shareholders and 52 percent in the hands of former Bowater shareholders.