Abitibi-Consolidated, Bowater amend merger agreement for U.S. tax deferral

By Lisa Kerner

Charlotte, N.C., May 8 - Abitibi-Consolidated Inc. and Bowater Inc. amended their Jan. 29 agreement to combine in an all-stock merger of equals so that the combination remains tax deferred for U.S. resident holders of Abitibi-Consolidated shares.

The amendment limits the number of exchangeable shares that may be issued to an amount that, when combined with exchangeable shares currently issued to holders of exchangeable shares of a Canadian subsidiary of Bowater, is less than 20% of the total voting power of the newly formed company, AbitibiBowater, Inc.

If eligible Abitibi-Consolidated shareholders elect to receive more exchangeable shares than are available under the limit, the remainder of their shares will be exchanged for shares of AbitibiBowater common stock, pro rata to their shareholdings, a company news release stated.

The companies said it is unlikely that eligible Canadian shareholders of Abitibi-Consolidated will be limited in their ability to receive exchangeable shares and to benefit from a similar tax deferral for Canadian income tax purposes.

"Deteriorating conditions in most markets provided significant challenges for the company during the quarter," Abitibi-Consolidated president and chief executive officer John Weaver said during a first-quarter earnings call on Tuesday.

"The situation does, however, underscore the strategic rationale and timing for our merger with Bowater. Together, our two companies will be stronger and better equipped to compete in the fiercely competitive global marketplace."

The company posted a first-quarter loss of $70 million, or 16 cents a share, more than double the loss of $33 million, or 8 cents a share, for the first quarter of 2006. Sales slipped to $1.07 billion in the period from $1.24 billion in the same period last year.

Under the merger agreement, each common share of Abitibi-Consolidated will be exchanged for 0.06261 common share of AbitibiBowater, and each Bowater common share will be exchanged for 0.52 common share of AbitibiBowater. A $28 million termination fee is included in the agreement.

AbitibiBowater will be based in Montreal, with regional manufacturing and sales offices in Greenville, S.C.

Its stock will be listed on both the New York and Toronto stock exchanges, according to a previous news release.

Former Abitibi-Consolidated shareholders will own 48% of the combined company, and former Bowater shareholders will own 52% of AbitibiBowater.

The merger, slated to close in the third quarter of 2007, is expected to create the third-largest publicly traded paper and forest products company in the United States with pro forma annual revenues of about $7.9 billion. AbitibiBowater's product lines will include newsprint, uncoated and coated mechanical papers, market pulp and wood products.

Abitibi-Consolidated's Weaver will serve as executive chairman of the new company; while Bowater president and chief executive officer David J. Paterson will serve in the same capacities at the new company.

AbitibiBowater's board will consist of seven members each from Abitibi-Consolidated and Bowater.

Based in Montreal, Abitibi-Consolidated provides newsprint, commercial printing papers and wood products.

Bowater produces coated and specialty papers and newsprint in Greenville, S.C.

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