June 27, 2008

Catalyst Expands Newsprint Clout

By Anonymous

NEWSPRINT Consolidation in the North American paper industry continued in early February with Catalyst Paper's acquisition of AbitibiBowater's 375,000 tonnes/yr Snowflake, AZ, newsprint mill for $161 million. AbitibiBowater will use the proceeds to repay debt. The acquisition of Snowflake boosts Catalyst's total newsprint production capacity by 60% to about 980,000 tonnes/yr, and moves the company into fourth place in the North American newsprint production hierarchy with an 8.6% market share, behind AbitibiBowater, White Birch and Kruger.

The deal means that just five producers now account for 85% of the newsprint supply for the North American market. It also means Catalyst becomes far and away the largest newsprint producer in western North America, with half as much capacity again as Norpac's Longview, WA, mill and well over twice the capacity of White Birch's Newberg, OR, mill. Additionally, Catalyst will make roughly one of every three tonnes of newsprint produced in the West. "Catalyst will finally be the gorilla. They will be the dominant player for a change," said one contact.

Catalyst president/CEO Richard Garneau said Snowflake was attractive for its cost competitiveness and location in a fast- growing metropolitan area. It would strengthen the company's West Coast presence and provide "a more freight logical way" to serve existing and new customers, and present the company with a natural hedge against Canadian dollar fluctuations. The mill in eastern Arizona is close to major newspaper markets in Phoenix (140 miles away), San Diego (450 miles away) and Los Angeles (500 miles away).

The transaction is expected to close in the second quarter. It is subject to the consent of the US Dept of Justice (DOJ), which mandated the mill's sale by the end of February as a condition for last year's merger of newsprint giants Abitibi-Consolidated and Bowater. A C$125 million rights offering will finance the deal, supported by a C$62.5 million backstop purchasing agreement with Third Avenue Management, Catalyst's largest shareholder, and another $62.5-million standby purchasing agreement with BMO Capital Markets and Genuity Capital Markets.

Vancouver-based Catalyst described Snowflake as "a leading recycled newsprint producer... regarded as one of the lowest-cost newsprint mills in North America." The company expects to generate $10 million in synergies after the purchase. The jewel in the crown, Snowflake's earnings performance significantly exceeded the earnings performance of Catalyst's three mills in British Colombia in 2004- 2006. For the threeyear period, the newsprint mills' EBITDA margins were 8.2%, 11.0%, and 13.5%. In contrast, Snowflake's EBITDA margins for the same three-year period were 24.8%, 27.9%, and 29.6%.

The acquisition includes a 125,000 tons/yr corrugating medium machine, owned by Smurfit-Stone Container, which is operated by the Snowflake mill under a contract that comes up for renewal this year. Catalyst and AbitibiBowater agreed to a three-year supply contract under which AbitibiBowater will provide about 40% of the Snowflake's recovered paper supply in the first year, decreasing proportionately over the life of the agreement. Thereafter, Catalyst intends to source the mill's fiber requirements itself, mainly using old newspapers.

Copyright Paperloop, Inc. Apr 2008

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