As if the recession wasn’t enough, paper manufacturer AbitibiBowater Inc. continues to deal with fundamental shifts in the newsprint industry at the same time it fights the expropriation of some of its assets by Premier Danny Williams’ Newfoundland and Labrador government, after the company said it would close its Grand Falls–Windsor mill. With hedge funds buying up AbitibiBowater’s stock and Fairfax Financial’s Prem Watsa offering to lend money at double-digit interest rates, the company is negotiating a narrow path to profitability. If you think your job is hard these days, try sitting in AbitibiBowater CEO David Paterson’s chair. Jeff Sanford spoke with Paterson about keeping it together in a tough environment.
How have you been dealing with the downturn?
It’s certainly a challenge. We’ve been dealing with declining demand for newsprint for several years. And we thought we were dealing with it well. But the recent developments, what I call a global de-stocking of all grades of paper and pulp, saw a big drop-off in demand late in the year. Our customers are under a lot of pressure. The latest has been the loss of ad spends. Papers traditionally get revenue from retailing, which is soft, automobiles, which is really soft, and real estate, which is also extremely soft. So the most traditional sources of ad spend are very stressed industries. That said, we have seen some signs that people are starting to order, or at least discuss ordering, more normal volumes in the second quarter.
What is the end game on the whole “paper to Internet” transition?
We don’t know yet. That’s the dilemma. We’ve been in this downward trend on consumption for several years now, and the belief is that in our industry there will be a plateau at some level. We haven’t reached that, obviously, but that’s the ultimate belief. Print will be smaller in terms of daily newspaper; but it will be part of the total delivery system for consumer news.…The strategy that is evolving is to get headlines and topical news from the web and then get in-depth news and analysis from print. That’s the model our customers are looking at.
What about the hedge funds and speculators who have been buying up your stock? What should we take from that?
We’ve had value investors for a long time. Let’s be honest, the company has not been investment grade for a while, and we’ve got investors in both the debt and the equity that are looking for outsize returns. They look for companies like ours that have great potential, a great set of assets and significant market share but need to be fixed. That’s when investors come in and expect management to turn the place around and deliver big returns. And that’s what we’re trying to do.
It’s a good sign then?
Well, it’s the capitalist system. The guys who take risky investments take higher rates of return. I don’t know if there’s a conservative investment to be found anywhere right now. I get asked the question, “Is it a bad thing to have this group of investors?” I say no. They’ve been very supportive and have been encouraging management to be aggressive. They ask the same fundamental questions you’re asking. What happens to the newsprint business? What do you do if newsprint doesn’t stabilize? [The answer] is some combination of right-sizing the business, industry consolidation, having the flexibility to start reinvesting in your best assets and understanding that there aren’t going to be as many mills or as many jobs. In the newsprint sector, we’re approaching 50% export now, and I would say that as a country we’ll be more than 50% export. The emphasis is shifting outside of North America.
Everyone thinks of China, but they’re actually a net exporter of newsprint. A good country to think of is Brazil, which has been a good market, even in this economy. The economy there is growing. And we have a nice position. And that’s primarily product from Canadian mills.
What about the Newfoundland expropriation?
In our opinion, it’s a highly unusual step to take. We expected tough negotiations on terms of exiting the province, but we didn’t expect expropriation. Our goal is to reach a settlement and not make it any more cumbersome on the government or us than it needs to be. We don’t have access to the legal system under the law they passed. We’re prohibited from filing a lawsuit in the province, which seems a little strange. It’s hard to win an argument when the government can write their own rules and laws and can do it in a way that’s highly prejudicial to us.
That leaves a bad taste obviously.
Certainly we were upset. I’m still upset about it. What’s that term Rumsfeld used? Shock and awe? If Premier Williams was going for shock and awe, he achieved his goal. But we have to stay level-headed about it and try to work through the system. Once you get mad, you can’t stay mad because you have to fix the issue.