N.Y. firm sets Catalyst on new course

	Tuesday » March 6 » 2007
N.Y. firm sets Catalyst on new course Saturday, March 03, 2007 With its two top executives bailing out, losses in 19 of the last 20 quarters, and a ranking as a small producer in a shrinking industry, Catalyst Paper hardly appears to be a candidate for investor confidence. The company's record gives most shareholders the shivers, but not New York investment fund manager Amit Wadhwaney. He thrives on the bad news. That's what got him involved in the Canadian forest products sector in the first place. Wadhwaney manages Third Avenue Management LLP's $4-billion international value fund and when he looked at the Canadian forest sector he saw energy costs were rising, the high-flying Canadian dollar was hurting producers in this country and readers were abandoning newsprint for the Internet. "I thought 'fascinating' -- something bad must be happening here," he said in a recent Barron's interview. All that bad news meant there must be opportunity somewhere. Third Avenue bought Norwegian giant Norske Skog's 19.8 per cent stake in Catalyst Paper in February 2006 when Norske sold its Canadian properties. Third Avenue also bought just under 20 per cent of Canfor Corp. "You buy these things when they are cheap and nobody believes there is any light at the end of the tunnel, and hopefully, if we haven't made a foolish decision, things work out," Wadhwaney said in an interview with The Vancouver Sun Friday. Catalyst, with four paper mills and a recycled newsprint mill in B.C., had struggled with two other absentee owners -- first Fletcher Challenge of New Zealand and then the Norwegians -- before it became a fully independent company in 2006. It was believed within Catalyst that both those companies placed their own interests first. When Third Avenue Management announced it intended to increase its stake to 38 per cent July 25, it was history repeating itself; only this time, instead of a foreign forest company, it was U.S. financiers stepping in. Catalyst's board didn't like what they saw in Third Avenue's bid, specifically that the Third Avenue offer didn't reflect the value of the company. And its intentions, in gaining effective control without taking up all the shares, were unclear. They called it a hostile takeover and launched a 60-day poison pill while a board committee looked in vain for another buyer. Relations were strained between the board and the company's largest shareholder. "Because we weren't invited into the club, we were called hostile bidders," Wadhwaney said of the fight to increase his stake. By early October, it was apparent there was no other buyer. "Given the difficult industry conditions," said Catalyst chairman Keith Purchase in a release to shareholders, "the board has concluded that an attractive alternative transaction is not available at this time" "They looked high and low and apparently found rather a lack of interest in buying those assets," Wadhwaney said. "They have lost money in 19 of the last 20 quarters. That certainly isn't a compelling record, is it?" Wadhwaney acknowledged that it was tough global market conditions and a higher Canadian dollar that affected the company's earnings, factors that served Third Avenue well. Third Avenue succeeded in increasing its stake in October after investors tendered 53 million shares. Third Avenue needed only 39 million. Wadhwaney celebrated his triumph by immediately launching a recruiting drive for new directors drawn from both the financial and pulp sectors. His intention: to rebuild both the board and the company, hand-picking people and then letting them set a new strategic direction. "This is a company that's going to be run for shareholders for a change," he said Friday. "All this grousing about taking control of the company on the cheap was, perhaps, a way of saying 'We may not be board members for very much longer.' " Third Avenue wanted to exercise "oversight" over Catalyst, he said. "The question is, how does one have an appropriate degree of oversight. You want the people who run the company to run the company, but you have to have some degree of oversight." To exercise that oversight, he wants directors with knowledge of the industry and finances that is separate and distinct from management. They will be active and involved in the company, he said. On Dec. 1, he succeeded in getting four new directors appointed, including himself. Two others had extensive restructuring and distress investing experience: Benjamin Duster IV of Atlanta and Neil Goldman of New York. Duster, who is chairman of Algoma Steel, worked with Goldman's firm, MacKay Shields on restructuring of Algoma. Business consultant Jeff Marshall of Toronto was the fourth. A fifth director, Denis Jean, formerly a director with SFK Pulp Fund, was nominated this week after Wadhwaney talked him into leaving SFK for Catalyst. With Third Avenue taking such an active role in reshaping Catalyst, it was only a matter of time before senior executives left. On Jan. 15 chief executive officer Russell Horner and chief financial officer Ralph Leverton announced they would be resigning March 28, the day Catalyst holds its annual shareholders meeting. Catalyst is now being run by a four-member committee while the search for a successor to Horner is underway. There's no guarantee the search will be complete by the March 28 annual general meeting, Wadhwaney said. The company also announced it was laying off 350 people, the last major decision developed by Horner's team. Today there is a very different board up for nomination at Catalyst, one Wadhwaney calls "engaged." The company's Feb. 26 prospectus provides a closer look: Current chair Purchase, who has a long history in the B.C. forest industry, did not put his name forward. Eight directors are to be elected March 28. Only three are from the old regime: business consultant Thomas Chambers, former B.C. finance minister Gary Collins and former Donohue CEO Michel Desbiens. The rest were those recruited by the new owners. Shareholders will be asked to approve a resolution changing the pay structure for directors, giving them more cash and opportunities to participate in the growth of the company. In return, they are expected to be more involved. Wadhwaney says Catalyst is going to be the last man standing in an industry that is struggling to adjust to shrinking demand for its products. He is convinced more pulp and paper mills are going to close as demand for newsprint shrinks. "I have time horizons that go on for quite some time. The government can step in with little Band-Aids here or there," he said in reference to bailouts offered the industry in Eastern Canada. "But what are they going to do when newsprint consumption keeps going down five to 10 per cent as it did last year? Something's going to have to give." How the new board intends to make Catalyst the last man standing, however, remains unclear, other than Wadhwaney wants to keep all mills operating. "We have to adapt in every which way to figure out how we are going to deal with this asset base, with our workers, to make sure everything is okay. We have to have some sort of plan for moving forward," he said. "When times are tough, people make tough decisions. Industry adapts. It's like an organism, it adapts to different circumstances and this industry is in the process of adapting to permanently lower levels of demand for its products." ghamilton@png.canwest.com © The Vancouver Sun 2007