Friday, April 17, 2009 0 comments ++[ CLICK TO COMMENT ]++

AbitibiBowater declares bankruptcy

AbitibiBowater, a North American newsprint giant, declared bankruptcy after strugggling under a mountain of debt and declining newsprint consumption, particularly by newspapers. I was tracking the company as a potential investment for a while and it's a good thing I never invested. Several value players such as Fairfax Financial and Third Avenue Value have lost a bundle on this company. Canadian contrarians running the ContraTheHeard newsletter (I have never subscribed to it) also lost out big.

I remember watching the Abitibi merger with Bowater two years ago and thinking how ridiculous it was at that time. Two struggling forestry companies with very high fixed costs and large debt merging together didn't seem like a plan for survival. Indeed, it never was much of a plan it turns out. As is almost always the case these days with mergers of any sort, insiders and executives made out with golden parachutes even though they largely retained their positions.

I think the company wil re-emerge from bankruptcy and end up as a smaller company. The way I look at it, forestry companies will continue to struggle, as newsprint consumption declines, and, possibly in the not too distant future, general paper consumption as well. Demand in developing countries has been rising fast, especially as literacy rates improve, but it's hard for North American producers to compete. Foreign competitors in Asia and South America don't follow the same environmental regulations and end up literally clear-cutting their way to profits. Even Weyerhaeuser, another forestry giant, this time in wood rather than newsprint, is thinking of taking radical steps, including spinning off timber assets and re-structuring as a REIT.

As this case illustrates, investing in distressed companies is really hard. I remember someone once told me that deep value investing was the hardest thing they ever did and they gave up on it.

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