Nearly a year after Abitibi Consolidated Inc. and Bowater Inc. told the world this January that they would combine in a highly-competitive, all-share “merger of equals,” the market for paper has begun to shrink so rapidly that smart investors should do only one thing: sell their shares before the new company is forced to restructure.
That’s according to Salman Partners analyst Paul Quinn, who cautioned investors in a recent note to “beware – high risk and no reward at this price.”
AbitibiBowater (ABH) shares were up almost $1, trading just over US$22 mid-day Monday.
But, Mr. Quinn wrote, “we believe that it is extremely unlikely that AbitibiBowater can resurrect itself under the present conditions. What looked like a good idea nine months ago … has turned out to be more difficult that anyone could have imagined."
“The company is exceedingly leveraged, with very little financial wiggle room. … We believe that AbitibiBowater will be forced into a three stage downward cycle of mill closures, write-downs, asset sales and repeat until the eventual financial restructuring occurs.”
The rising Canadian dollar and fast-dropping demand for newsprint – which in 2007 doubled its year-over-year drop to 10% -- are simply wiping out any gains the merger might have created, Mr. Quinn said, and assigned the company a 12-month share target of US$15.75 per share, with a sell recommendation.
Others, however, are not as pessimistic. Raymond James analyst Daryl Swetlishoff, also writing in a recent investors note, said “significant recent share price weakness” caused him to upgrade AbitibiBowater to “market perform” from “underperform” with a six to 12-month target of US$21.