Long Live Dead Trees by Andrew Bary
Summary: Newsprint producers and long term NYSE underperformers Bowater Inc. (BOW) (at $23), and Abitibi-Consolidated Inc. (ABY) (at $2.80) are merging to create the third largest forest-products company in North America, after Weyerhaeuser (WY) and International Paper (IP). Bowater (worth $1.4 billion) and Abitibi (worth $1.2b) will have a combined $8b in annual revenue, and $5.6b in debt. They plan to save $250 million annually by 2009, preparing for BOW CEO David Paterson's bottom-of-the-cycle, industry upswing forecast. Newsprint manufacturing's general disfavor might make AbitibiBowater a patient, contrarian investor value play: 1) Poor results in coming quarters may constitute a bottom. 2) Declining readership in the West is offset by rising readership in the developing world. 3) The merger may augur more (necessary) industry consolidation. 4) Dwindling old newsprint supplies has nearly doubled recycled paper prices to $160/ton. Rising costs are likely to hurt developing nations like China more than BOW's recycled paper mills. 5) U.S. government tariffs, announced Friday, on imported Chinese paper should help too. 6) When AbitibiBowater's merger is likely approved, they may sell assets: BOW's Catawba factory in South Carolina could be worth $1b alone, as are ABY's hydropower assets. Barron's Bottom Line: BOW should turn a profit in 2008, sending shares to $35-$39. ABY could hit $5/share.
ABY & BOW 1-yr. chart: