Two Canadian Forest Products Companies Cut Their Losses

Slump in pulp and newsprint markets kept bottom line in the red

CANADIAN Pacific got tired of waiting for the pulp and paper business to turn around, so it sold its forest product subsidiary. Some analysts think it sold too soon.

The $698 million (Canadian; US$532 million) of its 61-percent interest in Canadian Pacific Forest Products Ltd. has done wonders for the balance sheet of Canadian Pacific Ltd. of Montreal. Apart from taking in the cash, it shed $1.5 billion in debt.

"Canadian Pacific will not have to incur any further losses from CP Forest Products," says Frederick Larkin of Bunting Warburg, a brokerage firm in Toronto.

"CP Forest makes 25 percent of its revenue from newsprint and 25 percent from pulp. The rate of recovery in those sectors has been slower than anyone predicted," he says. Focus on core business

Canadian Pacific, the company which owns railways, hotels, oil and gas, and huge coal deposits (which it ships on its railway, ships, and trucks), says it wanted to focus on its "core" businesses. Company chairman William Stinson did not actually say he was tired of pouring money into CP Forest, but he did call it the "most troublesome sector."

"Pan Canadian Petroleum is the jewel in its energy holdings," Mr. Larkin says. "Selling CP Forest is a significant step because it slims down the range of activities, narrowing the focus."

CP Forest Products lost $189 million last year and lost another $112 million in the first six months of this year. The firm has spent billions modernizing its mills and plants; it is now the largest single supplier of recycled newsprint in North America.

"Over the past three to four years CP Forest has spent some $2 billion. Write-offs of old, inefficient facilities and major environmental expenditures [are] behind them," wrote Jaak Puusepp, the Vancouver-based forest analyst for RBC Dominion Securities. A major market position

CP Forest company was formed in 1988 out of CIP (Canadian International Paper, the Canadian unit of International Paper) and Great Lakes Paper. It is one of the largest pulp and newsprint firms in the world.

Because of CP Forest's dominant position in the market and its upgraded facilities, many people thought Canadian Pacific sold too soon.

"This company can make a lot of money when pulp and newsprint prices improve," says John Duncanson, analyst with Sanwa McCarthy Securities in Toronto. "And the Canadian dollar is going the right way. This company is particularly sensitive to currency swings."

Both pulp and newsprint are priced in United States dollars; and the bulk of sales is to the American market. Every one cent fall in the Canadian dollar makes up somewhat for sluggish prices in pulp and newsprint. The Canadian dollar has recently fallen from 80 cents to 76 cents.

"CP is selling out a little too early, especially after seeing the company through all that capital spending," says an analyst who asked not to be named.

Another Canadian forest products company which is restructuring is Stone Consolidated, the Canadian subsidiary of Stone Container Corporation of Chicago. Stone Consolidated will be split into two divisions and part sold off in a public share offering.

Analysts estimate the new company could be worth as much as US$1 billion. The reason for the sale: Low pulp and newsprint prices have meant Stone Container is straining to pay its debt on Stone Consolidated.

"Stone is in severe financial straits. It has an over-leveraged balance sheet," an analyst says. Loss-making venture

Stone Container bought Consolidated in the late 1980s from Power Corporation of Montreal. In 1992 Stone's Canadian subsidiary lost US$78.2 million. The parent company has not made a profit since 1990.

Stone may have more troubles ahead. Recent share issues of forest product companies have not been that successful.

On Aug. 11 there was an issue to sell the Reichmann family's holdings in Abitibi Paper. The Reichmann's owned Olympia and York Development, the failed property company.

"It went poorly," a broker says. "It didn't sell out."

Even a sharp rise in lumber prices has not saved the ailing balance sheets of the forest product subsidiaries of Canadian Pacific and Stone Container.

"It's a simple case of trading in debt for equity," says analyst Mr. Duncanson.