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Abitibi-Price Inc.

Abitibi-Price Inc.

2 First Canadian Place
Toronto, Ontario M5X 1A9
Canada
(416) 369-6700
Fax: (416) 369-6790

Public Company
Incorporated:
1912 as Abitibi Pulp & Paper Co. Limited
Employees: 14,300
Sales: C$3.09 billion (US$2.66 billion)
Stock Exchanges: Toronto Montreal Vancouver New York

Abitibi-Price Inc. is the worlds largest maker of newsprint and a diversified manufacturer and distributor of office, building, and paper products. Since 1981 Abitibi-Price has been controlled by Olympia & York, the Toronto-based real estate empire run by the Reichmann family, but has continued to operate with little interference from its 85%-owners. Abitibi-Prices core businesses in pulp and paper are notoriously cyclical and the company suffered a 14-year receivership during and after the Great Depression, but since then it has been among the most successful of Canadas many forest-products firms.

Along with much of the Canadian paper industry, Abitibi-Price owes its existence to the bitter squabbling that developed in the latter part of the 19th century between U.S. manufacturers and consumers of newsprint. Ever since the newspaper industry had converted from rag-based paper to paper made from the pulp of trees in the 1870s, it had been troubled by ecurring overcapacity and disastrous price wars, followed by attempts to moderate competition by mergers and combinations. The most ambitious of these was the creation in the 1890s of International Paper Company from the assets of 19 U.S. paper concerns. In the first decade of the 20th century International Paper controlled nearly 75% of the U.S. newsprint market, a situation that elicited charges of monopoly and price gouging from the publishers of newspapers. The publishers were able to publicize widely their accusations, sometimes coupling them with warnings about the need to protect freedom of the press from coercive economic forces. They eventually convinced the U.S. Congress to remove a longstanding tariff on imported paper products. The lifting of the tariff in 1913 prompted a rush to build plants in Canada, which by virtue of its abundant forests and water power was a natural site for pulp and paper manufacture. In the year 1911 alone, some 81 new forestry companies had been created in Canada, in anticipation of the lifting of the tariff. It was in the midst of this stampede, in 1913, that Abitibi Power & Paper Company Limited had its origins.

Abitibis founder was an American named Frank H. Anson, born in 1859 in Niles, Michigan. Before coming to the paper business, Anson had worked as a railroad ticket agent, rubber prospector, exporter, and as general superintendent of Ogilvie Flour Mills in Montreal. While at Ogilvie, Anson became interested in the mining wealth of Ontarios northern reaches, and in 1909 Anson hired two young men from McGill University to prospect for him in that remote part of Canada. The students found no minerals but did recommend that Anson start a paper mill along the Abitibi River, from whose swift current electrical and mechanical power could be generated to run such an operation. With the abolition of the U.S. paper tariff drawing closer every day, Anson enlisted the financial backing of Shirley Ogilvie, son of the Ogilvie Flour Mill family, and in 1913 erected the Abitibi Pulp & Paper Co. Limited mill on the Abitibi River 300 miles north of Toronto at Iroquois Falls. In 1914 Abitibi Pulp & Paper changed its name and reincorporated as Abitibi Power & Paper Company Limited, since the firm also sold electric power from its hydroelectric facility. Ansons timing was very good: World War I soon drove up the price of newsprint to an all-time peak of US$65 per ton, and the new Canadian paper companies enjoyed unrestricted access to the immense U.S. markets.

So successful were the paper companies on both sides of the border that another round of investigations of the industry was launched, and in 1917 the U.S. Department of Justice began antitrust prosecution of the members of an industrywide cooperative group called the News Print Manufacturers Association. The associations membership pleaded no contest, paid US$11,000 in fines, and dissolved the organization, none of which prevented the price of newsprint from nearly doubling by 1920 to a new record of US$112.60 per ton. The newsprint industrys history of antitrust allegations and cyclical depressions seems to be a result of three factors: the enormous cost of building new plant capacity; the relative inelasticity of demand for newsprint, sales of which do not tend to increase when its price drops; and the highly influential voice of the products consumers, the newspaper community. Since competition often proved fatal, newsprint manufacturers often tried to curb competition, resulting in well-publicized accusations by the newspapers of antitrust violations.

The postwar price peak encouraged a full decade of nonstop expansion in the Canadian paper industry, which nearly doubled its capacity by the year 1930. The consequence of this expansion was a long decline in the price of newsprint, which, by the end of the decade, fell to about US$62 per ton, and a growing overcapacity, which, as early as 1928, threw the industry into a premature depression all its own.

Abitibi Power & Paper had participated enthusiastically in the decade of expansion. It entered the fine-paper business with the purchase of a sulfite pulp mill at Smooth Rock Falls, Ontario; acquired substantial interests in Manitoba Paper Company and Sainte Anne Paper Company; and built its own mills to the extent that it became one of the industrys more important competitors. Faced with the problems of increased capacity and dropping product price, Abitibi and its fellow manufacturers concluded that their best chance for collective survival was to amalgamate their holdings. Accordingly, in 1928 Abitibi engineered a quintuple merger, buying up the remainder of Manitoba Paper and Sainte Anne Paper and adding three othersSpanish River Pulp and Paper Mills, Fort William Power Company, and Murray Bay Paper Company. These, and a number of subsequent purchases by Abitibi, proved disastrous, but at the time it was hoped that by means of consolidation the industry could prevent price competition as well as increase production efficiency. The strategy might have succeeded in a thriving economy, but instead Abitibi was hit by the Depression and soon was in desperate straits.

By 1932 sales had dropped to a fraction of their earlier levels, while the companys C$50 million debt was more than four times what it had been in 1927. This combination could not long be sustained, and on June 1, 1932, Abitibi defaulted on interest payments and was thrown into receivership. For the next 14 years Abitibi was directed by a court-appointed receiver, whose task it was to stabilize the companys finances, pay down the outstanding debts, and return the company to its shareholders at some future date. By 1933 the price of newsprint finally stabilized, allowing Abitibi to begin the long road back to solvency. The remainder of the 1930s was not a bad period for Abitibi, which managed to earn a fairly steady 15%-20% operating income for use in debt reduction and maintenance of its physical assets. World War II revived the economy, and in 1940 Abitibi sales jumped immediately and remained between C$25 million and C$30 million for the duration of the war, providing the company with an excellent return and setting the stage for an end to receivership.

In 1943 the premier of Ontario appointed a committee for the purpose of designing a plan to take Abitibi out of receivership, and after the committees recommendations were accepted by all the creditors in 1946, the company was formally independent once again. Abitibis 14-year receivership was the longest and most important in the history of Canadian industry, a trauma that would leave its mark in the form of a conservative corporate philosophy and deep skepticism about future expansion of capacity. Abitibis experience during the Depression was only an extreme example of the Canadian paper industry as a whole; and when a remarkable postwar surge in demand for newsprint raised and prompted U.S. demands for increased capacity, the Canadian producers generally chose to increase production speed at existing plants rather than add new ones.

Abitibi chief executive Douglas W. Ambridge strongly concurred with the prevalent conservatism, guiding Abitibi through two postwar decades of bountiful sales and profit increases while avoiding unnecessary capital expenditures. In this he was helped by the extraordinary expansion the company had undertaken in 1928, which provided Abitibi with a reserve of production capacity so great that corporate assets did not surpass those of 1928 until 30 years afterward. Abitibi thus merely made use of what plants it had to meet the fast increasing demand during the 1950s, allowing Ambridge to keep debt low and the earnings per share extremely high. After the years of receivership, the 1950s were a new golden age.

Dissatisfaction among U.S. publishers with Canadian reluctance to expand capacity led to a series of investigations of the industry, of which only onein 1939led to the filing of suit by the Justice Department for antitrust violations. It is hard to determine what degree of collusion, if any, existed among the Canadian newsprint manufacturers during the period in question, but the continual allegations encouraged the U.S. government to offer substantial tax incentives to its domestic forestry business, which began to chip away at Canadas market share. Most of the new U.S. plants were built in the South, where labor rates were low by Canadian standards and an unusually strong grade of indigenous kraft paper allowed the manufacture of a more durable newsprint.

In 1965 Abitibi Power & Paper Company Limited changed its name to Abitibi Paper Company Ltd. Abitibi had been feeling the effects of the new U.S. presence as early as 1962, when, together with the rest of the Canadian industry, it entered a decade of declining net income and diminished share of the critical U.S. market. To counteract this trend, Abitibi overcame its habitual reluctance to expand with the 1968 purchases of Cox Newsprint, Inc. and Cox Woodlands Company for US$36.58 million. Cox, located in Augusta, Georgia, added 150,000 tons per year of newsprint capacity to Abitibis Canadian holdings of 1.1 million tons, and gave the company a presence in the booming southern industry.

A new generation of leaders at Abitibi, headed up by chief executive officer Tom Bell and chief operating officer Harry Rosier, became increasingly aggressive in the search for additional capacity. When three exceptionally lean years were followed by the upsurge of 1973-1974, in which short span Abitibi sales soared from C$307 million to C$552 million and its capacity was strained, Rosier suggested that it would be cheaper for the company to buy existing mills than to build them from scratch. After a brief search for likely targets Bell and Rosier, in late 1974 went after and won control of 54% of the outstanding common shares of The Price Company Limited, a fellow Canadian paper concern with 1974 sales of C$335 million. Like Abitibi, Price was strongest in newsprint and kraft production, but it had no fine-paper and building-materials divisions, and it recorded a significantly higher proportion of its sales outside North America than did Abitibi. Both companies had modest but profitable base-metal mining operations in Canada, and together they controlled rights to about 50,000 square miles of forest landan area somewhat smaller than the state of Illinois. Price was a company much older than Abitibi, dating back to the early 19th century and the British navys need for a new source of lumber for its masts. In 1910, William Price had been sent by a leading London lumber merchant to Canada to organize the new operation, and Price subsequently started the company bearing his name.

No sooner had Abitibi completed its 22-day C$130.11 million conquest of The Price Company than the newsprint market collapsed, cutting the combined companies 1975 net by two-thirds, at a time when its debt was nearly doubling. Once again, Abitibis poor timing led indirectly to a change in ownership. Caught in a cash squeeze, Abitibi tried to placate union demands with big pay hikes and thereby avoid a disastrous strike; instead the unions pushed their advantage and forced the strike anyway. The walkout was bitter and lasted for months, and by the time the economy rebounded in 1977 Abitibi was still trying to put its shaken house in order. In October 1978 Abitibi agreed to buy about 10% of Prices outstanding stock from Consolidated-Bathursta Canadian company that had bid against Abitibi for control of Price in 1974 and still held 10% of Prices stock. Later that month, Abitibi purchased Prices remaining shares. Abitibi paid about C$95 million for the 46% outstanding.

In December 1978 Consolidated-Bathurst bought 10% of Abitibis stock and set off a prolonged bidding war for control of the company. When the dust settled 15 months later Abitibi-Pricewhich had assumed its present name in October 1979 was part of the Reichmann brothers extraordinary business domain, their family-owned Olympia & York paying C$670 million for 92% of the companys stock. Olympia & Yorks stake stood at 85% in late 1990. So vast are the real estate and stock holdings of the Reichmanns that Abitibi-Price figures as a footnote in their annual accounting, but perhaps for that reason the brothers appear to be the ideal silent partner for Abitibi-Prices management, offering great financial strength when needed but never meddling in the affairs of a business they know little about.

Since that time, Abitibi-Price has made a concerted effort to lessen its dependence on the brutally cyclical newsprint business. By the end of the 1980s the companys diversified group operated the largest network of paper distributors in Canada; the largest envelope manufacturer and largest school and office supplies maker; and one of the leading producers of building materials in the United States. The diversified group in 1990 accounted for approximately 50% of corporate revenue, the remainder generated by the paper groups two divisions of newsprint and printing papers. Newsprint is easily the most profitable segment, however, and remains the heart of Abitibi-Prices various holdings; which means that the company has not yet succeeded in escaping the cyclic ups and downs of that industry. After four straight years of bullish profits, the bottom dropped out once again in 1989, and in that years annual report management calmly admitted that the picture would not improve for at least 18 months. In 1990 Abitibi-Price lost C$45 million. Experienced cyclists know better than to beat around the bush.

Principal Subsidiaries

Abitibi-Price Corporation; Abitibi-Price Refinance Inc.; Abitibi-Price Sales Company Limited; Axidata Inc.; Gaspesia Pulp & Paper Company Limited (51%); Grand Falls Central Railway Company Limited; Mattabi Mines Limited (40%).

Further Reading

Mathias, Philip, Takeover, Toronto, Maclean-Hunter, 1976.

Jonathan Martin

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