Activist hedge fund moves on Abitibi

Date: Monday, February 9, 2009
Author: Konrad Yakabuski, The Globe & Mail.com

A U.S. hedge fund with a reputation as an activist investor has become the biggest shareholder in AbitibiBowater Inc., putting added pressure on management at the struggling paper giant to find a speedy solution to its financial woes.

Seattle-based Steelhead Partners LLC revealed in a regulatory filing made Friday that it now holds 14.8 per cent of Abitibi's shares. The fund has tripled its stake in the debt-heavy newsprint king in recent weeks, jumping to the head of the pack among Montreal-based Abitibi's shareholders.

Steelhead first said in July that it had acquired 5 per cent of Abitibi's shares, surpassing the threshold that required it to disclose its holdings under securities laws. Its stake had grown to 10 per cent in early January and almost 15 per cent by the end of the month, according to its most recent filing made with the U.S. Securities and Exchange Commission.

An Abitibi spokesman said he was unaware of Steelhead's involvement. But the hedge fund's move could complicate an already dicey situation as the clock runs out on Abitibi's attempts to juggle competing demands from creditors, customers, shareholders and governments.

The investment by Steelhead comes as Abitibi, which holds more than 40 per cent of the North American newsprint market, scrambles to refinance or repay more than $700-million (U.S.) due this year, and complete the sale of its prized hydro assets in Ontario to raise cash. Abitibi also faces a likely decline in newsprint prices as the recession further saps already sliding demand for its core paper product.

Abitibi's dramatic moves to slash its newsprint capacity by more than a quarter in the past two years - including an 830,000-tonne reduction announced in December - had sent newsprint prices to a record high of about $770 a tonne in late 2008.

But sources said Abitibi's competitors have been recently caving in to demands from publishers for a break on prices. Privately-held White Birch Paper Co. of Greenwich, Conn., which produces almost one million tonnes of newsprint at three Quebec mills, reportedly struck a deal with USA Today publisher Gannett Co. that undercuts Abitibi's pricing.

High prices, along with the sinking Canadian dollar, had allowed Abitibi to voice optimism about its prospects for 2009. But the vise now appears to be tightening around the iconic Canadian paper producer.

Steelhead is known for its aggressive stance toward management. It recently challenged a decision by junior oil patch player Canadian Superior Energy Inc., in which Steelhead owns a 12-per-cent stake, to extend a $14-million (Canadian) bridge loan to a company in which it said Canadian Superior chairman Greg Noval had "a sizable financial interest." The controversy led to Mr. Noval's resignation as chairman of Challenger Energy Corp., the company that received the loan from Canadian Superior, and a move last week by Challenger to put itself up for sale to repay the bridge loan.

Steelhead also headed the shareholder committee at California electricity producer Calpine Corp. as it reorganized its affairs under Chapter 11 of the U.S. bankruptcy code in 2007, challenging several moves in that restructuring.

Steelhead's presence could increase the pressure on Abitibi to raise cash quickly. Abitibi has a non-binding agreement to sell its lucrative Ontario hydro stations to a unit of Toronto-based Brookfield Asset Management Inc. But sources said Abitibi has been stalling in order to get a higher price for the hydro plants that provide cheap electricity to two Northern Ontario mills.

A deal is further complicated by concerns that the mills could close without access to the cut-rate power. That has put the Ontario government, whose approval is needed for the hydro sale to proceed, in a difficult position.

In December, Newfoundland and Labrador Premier Danny Williams expropriated Abitibi's hydro assets in that province after the company closed a newsprint mill there. Abitibi had been counting on selling the power stations quickly to raise cash. But negotiations on a compensation package with Newfoundland could now drag on for months.