Catalyst CEO, CFO resign, clearing the way for hedge fund to gain more control

Date: Monday, January 15, 2007
Author: Romina Maurino, CBC News

TORONTO (CP) - The two top executives at Catalyst Paper Corp. (TSX:CTL) resigned from the Vancouver company Monday, clearing the way for hedge fund and major shareholder Third Avenue Management LLC to install its own people to run and possibly restructure one of Canada's biggest pulp and paper producers.

President and chief executive Russel Horner and chief financial officer Ralph Leverton will stay until March 28, when Catalyst holds its next annual meeting, or until their successors or interim replacements are announced, Catalyst's board of directors said.

The resignations come a few months after New York-based investor Third Avenue acquired an additional 39 million common shares of Catalyst, bringing its holding to just under 38 per cent.

That purchase exceeded a 25 per cent threshold established under the executives' agreements with Catalyst, and constituted a change of control under such agreements, said the producer of newsprint and specialty paper.

That allowed them to leave and be paid millions of dollars in separation packages.

Catalyst spokeswoman Lyn Brown said board and ownership changes made it "an ideal time to make an executive transition as well," adding that the company's board of directors has an executive search under way.

"This is not unusual in terms of changes at the top," she said. "These gentlemen have given us an extended notice and that permits the continuity and orderly transition to new leadership."

Under the terms of the control change agreement, Horner and Leverton are entitled to receive payments totalling $4.8 million and $1.6 million, respectively.

"I think they saw the writing on the wall with Third Avenue, and they expected Third Avenue to replace the executive team," said Paul Quinn, an analyst with Salman Partners.

"Under their contract, they have a very good exit strategy for both the CEO and the CFO, so they walk away with lots of money."

Last month, Catalyst appointed four new members to its board of directors at the hedge fund's request, accepting the resignations of two others. Benjamin Duster IV, Neal Goldman, Jeffrey Marshall and Amit Wadhwaney, a portfolio manager and senior research analyst with Third Avenue all joined the board while directors Mark Dodson and Alice Laberge resigned.

Catalyst's board will choose the replacements, Quinn said, but they will do so "with lots of deference to Third Avenue, because they're the ones that have made the stock move and they're the ones with the plan."

That plan will likely include job cuts, although those aren't likely until 2008 because of labour contracts currently in place, Quinn added.

"If you compare the staffing levels of the average Catalyst mill with other paper manufacturers out there, you would see that there's more people at Catalyst," he said.

"That's got to come in line with the average - there's a substantial bucket of money in potential savings."

Salman Partners currently has a "sell" rating on the company, and believes newsprint prices are weakening.

"Although Catalyst broke even last quarter, we think they're going to lose money again this quarter and in '07," Quinn said.

Catalyst produces mechanical printing papers and market kraft pulp. It also owns Western Canada's largest paper recycling centre, with five mills employing 3,500 people.

The company earned a small a small profit of $2.5 million for the three months ended Sept. 30., compared with of $32.4 million a year ago.

Third quarter sales rose to $486 million from $450.3 million. During that quarter, the company spent $2.2 million dealing with the Third Management offer, which it was opposed.

Horner has worked for Catalyst and its predecessor companies, most recently known as NorskeCanada, for more than 30 years, while Leverton joined Catalyst in 1999.

On the TSX Monday, Catalyst stock closed at $4.15, up one cent, before the changes were announced.