updated 1/11/2008 6:27:45 PM ET 2008-01-11T23:27:45

Canada’s Abitibi-Consolidated Inc. and Bowater Inc. of South Carolina said Monday they will combine in an all-stock deal that would create the third-largest publicly traded paper and forest products company in North America.

The combined company would be known as AbitibiBowater Inc. and would have annual revenues of about $7.9 billion and a market capitalization of about $2.4 billion.

The companies said the combined company would be “operationally and financially stronger” and could compete better globally while adapting to lower demand for newsprint in North America.

Shares of both companies soared on the news. Bowater shares climbed $4.92, or 22 percent, to $27.07 in midday trading on the New York Stock Exchange, while Abitibi’s U.S. shares rose 66 cents, or 25 percent, to $3.30.

Under the agreement, Abitibi shareholders will get 0.06261 common share of the combined company for their shares, and Bowater shareholders will get 0.52 common share for theirs. The resulting mix will leave 48 percent of shares in the hands of former Abitibi-Consolidated shareholders and 52 percent in the hands of former Bowater shareholders.

Abitibi President and Chief Executive John W. Weaver will become executive chairman of AbitibiBowater, and Bowater Chairman, President and CEO David J. Paterson will serve as president and CEO.

Each company will contribute seven directors to the resulting board.

The company will be based in Montreal, Quebec, where Abitibi is currently based, with a U.S. regional manufacturing and sales office in Greenville, S.C., current site of Bowater headquarters.

Weaver and Paterson have been working on the deal for about three months, Paterson said in a phone interview with The Associated Press. The two got to know each other shortly after Paterson took his job at Bowater over the summer, Paterson said.

At the time, both companies were looking “options for growth,” Paterson said.

“We did our homework. We did our due diligence,” Paterson said. “We felt this was the right one to pursue.”

The companies expect the transaction to close by the third quarter of 2007.

The combined company should be able to cut annual costs by about $250 million as a result of efficiency in areas such as production, selling, general and administrative costs, distribution and procurement, the companies said.

The new company will have “a brighter future than either company would have on its own,” Weaver said in a statement.

Paterson said the deal was “a logical strategic step to address the realities of today’s marketplace.”

AbitibiBowater’s product lines will include newsprint, uncoated and coated mechanical papers, market pulp and wood products. It will also be one of the world’s leading consumers of recycled newspapers and magazines.

The combined company will own or operate 32 pulp and paper facilities and 35 wood product facilities located mainly in Eastern Canada and the Southeastern U.S.

The combined company will have about $5 billion in debt. Weaver and Paterson said the savings and continued forest land sales will help reduce that.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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