# United States v. Abitibi-Consolidated Inc. et al.; Response to Public Comment on the Proposed Final Judgment

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URL: https://www.frixlaw.com/law-library/documents/fr%3AE8-11401

## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** June 10, 2008
- **Citation:** 73 FR 32834

## Text

DEPARTMENT OF JUSTICE
Antitrust Division
United States v. Abitibi-Consolidated Inc. et al.; Response to Public Comment on the Proposed Final Judgment

Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 16(b)-(h), the United States hereby publishes the public comment received on the proposed Final Judgment in
United States of America
v.
Abitibi-Consolidated Inc. et al.
, Civil Action No. 1:07-cv-1912 and the response to the comment. On October 23, 2007, the United States filed a Complaint alleging that the merger between Abitibi-Consolidated Inc. (“Abitibi”) and Bowater Inc. (“Bowater”) violated Section 7 of the Clayton Act, 15 U.S.C. 18. The proposed Final Judgment, filed on October 23, 2007, requires the combined company to divest Abitibi's Snowflake, Arizona paper mill. Public comment was invited within the statutory 60-day comment period. Copies of the Complaint, proposed Final Judgment, Competitive Impact Statement, Public Comment and the United States' Response to the Comment and other papers are currently available for inspection in Suite 1010 of the Antitrust Division, Department of Justice, 450 5th Street, NW., Washington, DC 20530, telephone: (202) 514-2481 and the Office of the Clerk of the United States District Court for the District of the District of Columbia, 333 Constitution Ave., NW, Washington, DC 20001. Copies of any of these materials may be obtained upon request and payment of a copying fee.

J. Robert Kramer II,
Director of Operations, Antitrust Division.

In the matter of: United States of America, Plaintiff, v. Abitibi-Consolidated Inc. and Bowater Inc., Defendants.

Case No: [1:07-cv-01912]
Judge: Collyer, Rosemary M.; Deck type: Antitrust.

Response of Plaintiff United States to Public Comments on the Proposed Final Judgment

Pursuant to the requirements of the Antitrust Procedures and Penalties Act (“APPA” or “Tunney Act”), 15 U.S.C. 16(b)-(h), the United States hereby files the Comment received from members of the public concerning the proposed Final Judgment in this case and the Response by the United States to the Comment. The United States will move the Court for entry of the proposed Final Judgment after the Comment and this Response have been published in the
Federal Register
, pursuant to 15 U.S.C. 16(d).

The United States filed a civil antitrust Complaint under Section 15 of the Clayton Act, 15 U.S.C. 25, on October 23, 2007, alleging that the merger of Abitibi-Consolidated Incorporated (“Abitibi”) and Bowater Incorporated (“Bowater”) would violate Section 7 of the Clayton Act, 15 U.S.C. 18. Simultaneously with the filing of the Complaint, the United States filed a proposed Final Judgment and an Asset Preservation Stipulation and Order (“Stipulation”) signed by plaintiff and defendants consenting to the entry of the proposed Final Judgment after compliance with the requirements of the Tunney Act. Pursuant to those requirements, the United States filed a Competitive Impact Statement (“CIS”) in this Court on October 23, 2007, published the proposed Final Judgment and CIS in the
Federal Register
on November 8, 2007, see
United States
v.
Abitibi-Consolidated Inc. and Bowater Inc.
, 72 FR 63187 (November 8, 2007); and published summaries of the terms of the proposed Final Judgment and CIS, together with directions for the submission of written comments relating to the proposed Final Judgment, in
The Washington Post
for seven days beginning on November 18, 2007, and ending on November 24, 2007. The 60-day period for public comments ended on January 7, 2008, and one comment was received as described below and attached hereto.

I. Background: The United States' Investigation and the Proposed Resolution

On January 29, 2007, Abitibi and Bowater announced plans to merge into a new company to be called AbitibiBowater Incorporated (“AbitibiBowater”). Over the next nine months, the United States Department of Justice (the “Department”) conducted an extensive, detailed investigation into the competitive effects of the proposed transaction. As part of this investigation, the Department obtained substantial documents and information from the merging parties and issued 37 Civil Investigative Demands to third parties. In response, the Department received and considered more than 150,000 pages of material. The Department conducted more than 60 interviews with customers, competitors and other individuals with knowledge of the industry. The sole commenter here, the Newspaper Association of America (the “NAA”), represents newspaper publishers in the United States. During the course of the Department's investigation into the proposed merger, the NAA shared with the investigative staff its concerns about the impact of the proposed merger on competition; the investigative staff carefully analyzed its concerns and submissions, as well as the data, market facts and opinions of other knowledgeable parties.

The Department concluded that the combination of Abitibi and Bowater likely would lessen competition in the North American newsprint market. Newspapers are printed on newsprint, the lowest quality and generally the least expensive grade of groundwood paper. Newspaper publishers, who buy more than 80 percent of all newsprint sold in the United States, have no close substitutes to use for printing newspapers because of newsprint's price and physical characteristics. Because publishers' newsprint presses are optimized to use newsprint, switching to another grade of paper would be costly. A small but significant increase in price likely would not cause customers to switch sufficient newsprint tonnes to other products or otherwise curtail their newsprint usage so as to render the increase unprofitable.

As explained more fully in the Complaint and CIS, the merger of Abitibi and Bowater would substantially increase concentration and lessen competition in the production, distribution and sale of newsprint in North America. After conducting a detailed analysis of the merger, the Department filed its Complaint alleging competitive harm in the newsprint market in North America and sought a remedy that would ensure that such harm is prevented.

The proposed Final Judgment in this case is designed to preserve competition in the production, distribution and sale of newsprint in North America. It requires the divestiture of a newsprint mill that manufactures newsprint for sale in North America. Specifically, the proposed Final Judgment directs a sale of Abitibi's Snowflake, Arizona, newsprint mill (“Snowflake,” or the “Snowflake mill”) to a purchaser acceptable to the United States.

In the Department's judgment, divestiture of the Snowflake mill to a qualified purchaser would remedy the violation alleged in the Complaint because the Snowflake mill, located in northeastern Arizona, is one of the most efficient and profitable newsprint mills in North America. Plans to improve the mill's efficiency in coming years with investments in energy and machinery are already underway. Snowflake's size and cost position ensure that its divestiture to a competitor of the

merged firm will preserve competition in the North American newsprint market. Although entry of the proposed Final Judgment would terminate this action, the Court would retain jurisdiction to construe, modify, or enforce the provisions of the proposed Final Judgment and punish violations thereof.
1

1
The merger closed on October 29, 2007. In keeping with the United States' standard practice, neither the Stipulation nor the proposed Final Judgment prohibited closing the merger. See ABA Section of
Antitrust Law, Antitrust Law Developments
406 (6th ed. 2007) (noting that “[t]he Federal Trade Commission (as well as the Department of Justice) generally will permit the underlying transaction to close during the notice and comment period”). Such a prohibition could interfere with many time-sensitive deals and prevent or delay the realization of substantial efficiencies. In consent decrees requiring divestitures, it is also standard practice to include a “preservation of assets” clause in the decree and to file a stipulation to ensure that the assets to be divested remain competitively viable. That practice was followed here. Proposed Final Judgment § IV(K). In addition, the Stipulation entered by the Court in this case required AbitibiBowater to hold separate the Snowflake newsprint mill, pending the divestiture contemplated by the proposed Final Judgment.

II. Standard of Judicial Review

Upon the publication of the Comment and this Response, the United States will have fully complied with the Tunney Act and will move for entry of the proposed Final Judgment as being “in the public interest.” 15 U.S.C. 16(e), as amended.

The Tunney Act states that, in making that determination, the Court shall consider:

(A) the competitive impact of such judgment, including termination of alleged violations, provisions for enforcement and modification, duration of relief sought, anticipated effects of alternative remedies actually considered, whether its terms are ambiguous, and any other competitive considerations bearing upon the adequacy of such judgment that the court deems necessary to a determination of whether the consent judgment is in the public interest; and

(B) the impact of entry of such judgment upon competition in the relevant market or markets, upon the public generally and individuals alleging specific injury from the violations set forth in the complaint including consideration of the public benefit, if any, to be derived from a determination of the issues at trial.

15 U.S.C. 16(e)(1)(A)-(B);
see generally United States
v.
SBC Commc'ns, Inc.
, 489 F. Supp. 2d 1, 11 (D.D.C. 2007) (concluding that the 2004 amendments “effected minimal changes” to scope of review under Tunney Act, leaving review “sharply proscribed by precedent and the nature of Tunney Act proceedings”).
2

2
The 2004 amendments substituted “shall” for “may” in directing relevant factors for court to consider and amended the list of factors to focus on competitive considerations and to address potentially ambiguous judgment terms. Compare 15 U.S.C. 16(e) (2004), with 15 U.S.C. 16(e)(1) (2006).

As the United States Court of Appeals for the District of Columbia Circuit has held, under the APPA a court considers, among other things, the relationship between the remedy secured and the specific allegations set forth in the government's complaint, whether the decree is sufficiently clear, whether enforcement mechanisms are sufficient, and whether the decree may positively harm third parties.
See United States
v.
Microsoft Corp.
, 56 F.3d 1448, 1458-62 (D.C. Cir. 1995). With respect to the adequacy of the relief secured by the decree, a court may not “engage in an unrestricted evaluation of what relief would best serve the public.”
United States
v.
BNS, Inc.
, 858 F.2d 456, 462 (9th Cir. 1988) (citing
United States
v.
Bechtel Corp.
, 648 F.2d 660, 666 (9th Cir. 1981));
see also Microsoft
, 56 F.3d at 1460-62. Courts have held that:

[t]he balancing of competing social and political interests affected by a proposed antitrust consent decree must be left, in the first instance, to the discretion of the Attorney General. The court's role in protecting the public interest is one of insuring that the government has not breached its duty to the public in consenting to the decree. The court is required to determine not whether a particular decree is the one that will best serve society, but whether the settlement is “
within the reaches of the public interest
.” More elaborate requirements might undermine the effectiveness of antitrust enforcement by consent decree.

Bechtel
, 648 F.2d at 666 (emphasis added) (citations omitted).
Cf. BNS
, 858 F.2d at 464 (holding that the court's “ultimate authority under the [APPA] is limited to approving or disapproving the consent decree”);
United States
v.
Gillette Co.
, 406 F. Supp. 713, 716 (D. Mass. 1975) (noting that, in this way, the court is constrained to “look at the overall picture not hypercritically, nor with a microscope, but with an artist's reducing glass”).
See generally Microsoft
, 56 F.3d at 1461 (discussing whether “the remedies [obtained in the decree are] so inconsonant with the allegations charged as to fall outside of the `reaches of the public interest' ”). In making its public interest determination, a district court “must accord deference to the government's predictions about the efficacy of its remedies, and may not require that the remedies perfectly match the alleged violations” because this may only reflect underlying weakness in the government's case or concessions made during negotiation.
SBC Commc'ns
, 489 F. Supp. 2d at 17;
see also Microsoft
, 56 F.3d at 1461 (noting the need for courts to be “deferential to the government's predictions as to the effect of the proposed remedies”);
United States
v.
Archer-Daniels-Midland Co.
, 272 F. Supp. 2d 1, 6 (D.D.C. 2003) (noting that the court should grant due respect to the United States' prediction as to the effect of proposed remedies, its perception of the market structure, and its views of the nature of the case).

Court approval of a consent decree requires a standard more flexible and less strict than that appropriate to court adoption of a litigated decree following a finding of liability. “[A] proposed decree must be approved even if it falls short of the remedy the court would impose on its own, as long as it falls within the range of acceptability or is `within the reaches of public interest.' ”
United States
v.
Am. Tel. & Tel. Co.
, 552 F. Supp. 131, 151 (D.D.C. 1982) (citations omitted) (quoting
United States
v.
Gillette Co.
, 406 F. Supp. 713, 716 (D. Mass. 1975)),
aff'd sub nom. Maryland
v.
United States
, 460 U.S. 1001 (1983);
see also United States
v.
Alcan Aluminum Ltd.
, 605 F. Supp. 619, 622 (W.D. Ky. 1985) (approving the consent decree even though the court would have imposed a greater remedy). To meet this standard, the United States “need only provide a factual basis for concluding that the settlements are reasonably adequate remedies for the alleged harms.”
SBC Commc'ns
, 489 F. Supp. 2d at 17.

Moreover, the Court's role under the APPA is limited to reviewing the remedy in relationship to the violations that the United States has alleged in its complaint, and does not authorize the Court to “construct [its] own hypothetical case and then evaluate the decree against that case.”
Microsoft
, 56 F.3d at 1459. Because the “court's authority to review the decree depends entirely on the government's exercising its prosecutorial discretion by bringing a case in the first place,” it follows that “the court is only authorized to review the decree itself,” and not to “effectively redraft the complaint” to inquire into other matters that the United States did not pursue.
Id.
at 1459-60. As this Court recently confirmed in
SBC Communications
, courts “cannot look beyond the complaint in making the public interest determination unless the complaint is drafted so narrowly as to make a mockery of judicial power.”
SBC Commc'ns
489 F. Supp. 2d at 15.

In its 2004 amendments, Congress made clear its intent to preserve the

practical benefits of utilizing consent decrees in antitrust enforcement, adding the unambiguous instruction “[nlothing in this section shall be construed to require the court to conduct an evidentiary hearing or to require the court to permit anyone to intervene.” 15 U.S.C. 16(e)(2). The language wrote into the statute what the Congress that enacted the Tunney Act in 1974 intended, as Senator Tunney then explained: “[t]he court is nowhere compelled to go to trial or to engage in extended proceedings which might have the effect of vitiating the benefits of prompt and less costly settlement through the consent decree process.” 119 Cong. Rec. 24,598 (1973) (statement of Senator Tunney). Rather, the procedure for the public interest determination is left to the discretion of the court, with the recognition that the court's “scope of review remains sharply proscribed by precedent and the nature of Tunney Act proceedings.”
SBC Commc'ns
, 489 F. Supp. 2d at 11.
3

3

See United States
v.
Enova Corp.
, 107 F. Supp. 2d 10, 17 (D.D.C. 2000) (noting that the “Tunney Act expressly allows the court to make its public interest determination on the basis of the competitive impact statement and response to comments alone”);
United States
v.
Mid-Am. Dairymen, Inc.
, 1977-1 Trade Cas. (CCH) ¶ 61,508, at 71,980 (W.D. Mo. 1977) (“Absent a showing of corrupt failure of the government to discharge its duty, the Court, in making its public interest finding, should * * * carefully consider the explanations of the government in the competitive impact statement and its responses to comments in order to determine whether those explanations are reasonable under the circumstances.”); S. Rep. No. 93-298, 93d Cong., 1st Sess., at 6 (1973) (“Where the public interest can be meaningfully evaluated simply on the basis of briefs and oral arguments, that is the approach that should be utilized.”).

III. Summary of the Comment and Response

During the 60-day comment period, the United States received one Comment, from the NAA. That Comment is attached to this memo. After reviewing the Comment, the United States continues to believe that the proposed Final Judgment is in the public interest. The Comment includes concerns relating to whether the proposed Final Judgment adequately remedies the harms alleged in the Complaint. The United States addresses these concerns below and explains how the remedy is appropriate.

A. Summary of Comment Submitted by the NAA

The NAA is an association whose members include daily and Sunday newspapers in the United States who purchase a significant proportion of North America's newsprint production. In its Comment of January 2, 2008, the NAA expressed concerns relating to whether the proposed Final Judgment adequately remedies the alleged harms. The NAA argued in its Comment that the Court should not enter the proposed Final Judgment without a hearing for two reasons: (1) the newly merged AbitibiBowater, despite its agreement to divest the Snowflake mill, “has already begun to exercise the market power created by the merger to anticompetitively raise newsprint prices to North American newsprint customers”; and (2) the United States “has not provided the Court with any factual or economic analysis to demonstrate that the proposed remedy will eliminate the incentive for AbitibiBowater to reduce industry capacity and raise prices to North American newsprint customers.” (NAA Comment at 2.)

1. The NAA's Argument That AbitibiBowater Has Already Begun To Exercise Market Power and Anticompetitively Raise Newsprint Prices

The NAA notes that a little more than five weeks following the merger that created AbitibiBowater, the combined firm announced that it would remove 600,000 metric tonnes of newsprint capacity from the North American market and would raise newsprint prices by $60 per metric tonne, to be implemented in three $20 price increases. The NAA further notes that “[m]ost” North American newsprint manufacturers not only joined AbitibiBowater's price increase but also implemented a “previously stalled” price increase of $25 per metric tonne. The NAA estimated that, taken together, these two price increases constitute a 15 percent price increase as compared to the pre-merger, October 2007, price for newsprint. The NAA also noted that, at the time AbitibiBowater announced the removal of 600,000 metric tonnes of newsprint capacity from the North American market, it also announced that “more mills could close in Canada later [in 2008].” (Comment at 7.)

The NAA claims that these post-merger actions by AbitibiBowater demonstrate that the United States “severely underestimated the risk that the merger posed to competition in the North American newsprint market and severely underestimated the incentive and ability of the merged firm to remove capacity from the market to raise the price of newsprint well above competitive levels.” (Comment at 7.) Accordingly, the NAA contends that a “significantly larger divestiture” than the Snowflake mill is required to prevent “the substantial anticompetitive price increases that are already occurring and will continue to occur as a result of the merger.” (Comment at 7.)

2. The NAA's Argument That the United States Has Not Provided Adequate Factual or Legal Analysis Upon Which To Base a Public Interest Determination

The NAA concedes that in the Complaint, the United States “correctly identifies the competitive harm produced by the merger.” (Comment at 9.) The NAA argues, however, that the United States has not provided the Court with a factual or legal analysis to demonstrate that the divestiture of the Snowflake mill will “eliminate the incentive to reduce industry capacity and raise prices to North American newsprint customers,” and thus has provided the Court with no basis by which to determine if the proposed remedy is in the public interest. (Comment at 9.) Specifically, the NAA argues that, other than noting that Snowflake is “among the largest and most profitable mills in the United States,” the United States “provided no further explanation for its decision that Snowflake was both a sufficient remedy and the best solution, no detail regarding under what `circumstances' this conclusion was reached, and no scale against which it measured Snowflake as the best alternative.” (Comment at 17.)

The NAA contends that the proposed Final Judgment should not be entered because the United States has not explained to the Court “why the remedy it proposes restores or preserves competition.” (Comment at 19.) In particular, the NAA criticizes the United States for failing to reference in the Complaint or CIS what the NAA describes as historical anticompetitive behavior of Abitibi and Bowater, and it contends that absent such references, it is impossible for the Court to determine if and how much of a factor such conduct played in the United States' evaluation and settlement of the merger. The NAA also criticizes the United States for failing to discuss the anticipated effects of alternative remedies actually considered.

B. Response of the United States to the NAA's Comment

The divestiture of the Snowflake mill adequately remedies the harm alleged in the Complaint. In negotiating this remedy, the United States carefully considered the capabilities and economic viability of the Snowflake mill as well as other assets of the merging parties; the extent of industry excess capacity; the history of declining demand for newsprint, and the forecasts for that decline to continue; the costs of

production of all newsprint mills in North America; and the financial viability of the merging parties and their competitors. After considering these issues, the United States analyzed the merger using a comprehensive data set of prices, sales, production volumes and costs, capacities and forecasts of North American newsprint demand. In its analysis, which drew upon non-public information unavailable to the NAA, the United States concluded that the divestiture of the Snowflake mill to a viable qualified purchaser will adequately redress the competitive harm alleged in the Complaint and restore competition to the market for the sale of newsprint in North America.

The United States and the NAA employed the same general economic model to examine the competitive effects of the merger. Accurate data about prices, manufacturing costs, the elasticity of demand and other factors can allow economists to model whether merging firms have an added incentive to exercise market power by reducing capacity after a merger. The United States and the NAA both attempted to determine whether the merger will cause the combined AbitibiBowater to eliminate newsprint capacity earlier than Abitibi and Bowater would have if they had remained independent competitors.

Although the United States and the NAA used a similar framework to model competition, the results differed significantly because of several important differences in the data. First, the United States had more complete and accurate data. Unlike the NAA, the United States was able to use a compulsory process to gather information. See, e.g., 15 U.S.C. 1311-14 (empowering the Antitrust Division to subpoena documents and take oral testimony). In this case, the United States had access to extensive and mill-by-mill data on sales (including exports), production volumes, capacities and costs. The NAA, on the other hand, had to rely on less accurate and publicly available information relating to mill capacities, prices and costs in assessing the profitability of and competitors' likely response to a post-merger price increase. Second, the United States conducted its own analysis of the effect of price changes on the demand for newsprint, using confidential information, in addition to considering estimates provided by others. Based upon its analysis, the United States believes that the estimate used by NAA understates the sensitivity of newsprint consumption to changes in price. In other words, the United States believes that if the price for newsprint rose, customers would purchase less newsprint than the NAA estimates. Third, the United States and the NAA viewed 2007 differently. While the NAA assumed that the newsprint market in 2007 was in equilibrium—which would allow that year's prices to be used as a reference point from which to measure future changes—the United States' investigation revealed that much of 2007 was a period of instability. Unexpectedly large declines in demand for newsprint created excess capacity and caused prices to fall dramatically. The fact that AbitibiBowater and other firms responded to declining demand for newsprint by closing mills that were consistently losing money is discussed in further detail in the following section.

The United States is confident that at the time it negotiated the proposed Final Judgment the divestiture of the Snowflake mill was in the public interest, based upon the best information available at that time. The United States remains confident that the divestiture of the Snowflake mill is in the public interest and adequately remedies the harms alleged in the Complaint.

1. AbitibiBowater's Recently Announced Decision To Reduce Excess Newsprint Capacity, and Industry-Wide Price Increases, Do Not Mean That the Parties Have Exercised Market Power

The NAA's argument, that the Snowflake mill divestiture is insufficient to prevent the combined firm from exercising market power by shutting additional capacity in order to raise prices, assumes that the combined firm's post-merger capacity reductions are the result of the merger. The NAA's suggestions to the contrary events since the filing of the proposed Final Judgment appear to be unrelated to any exercise of market power. The ongoing sharp decline in demand for newsprint in North America, increases in the prices of key inputs into the production of newsprint, and the continued decline in the value of the United States dollar all have disrupted the supply and demand equilibrium for newsprint. Industry observers expect disruptions to continue as North American demand for newsprint declines. Manufacturers will respond by intermittently closing capacity, which will cause the market price to lurch from one equilibrium to another as it adjusts to these shocks to supply. Thus, in a market with declining demand, prices can be expected to fall when the decline in demand creates excess supply and increase when unprofitable capacity is closed in response to that decline in demand. In the remainder of this section, we will discuss the effects of these trends on the newsprint market and show that a careful analysis suggests that the NAA's claims are unfounded.

Demand for newsprint in the North American market “has declined over the last several years at a rate of approximately 5 to 10 percent per year because of a significant decline in demand for newspapers. * * * This decline in the demand for newsprint is projected to continue, and the resulting excess newsprint capacity will likely lead Defendants and their competitors to close, idle or convert more newsprint mills.” (Complaint at ¶ 17;
see also
CIS at 5.) As North American demand continues to decline, notwithstanding the merger, all firms, including AbitibiBowater, will eventually have to close inefficient newsprint capacity. In its Comment, the NAA ignores the possibility that AbitibiBowater's post-merger decision to close some of its inefficient capacity was a natural reaction to the continued decline in demand for newsprint and may in fact be perfectly consistent with a competitive market.

The pressure to close inefficient capacity also intensified in 2007 because the prices of key production inputs—specifically, recycled fiber, wood pulp and energy—rose sharply. This increase in input costs has raised the costs of all producers and put upward pressure on the price of newsprint. Further, the United States dollar has lost value relative to the Canadian dollar, which has the effect of raising the costs of Canadian producers of newsprint—the bulk of North American newsprint capacity is located in Canada—and hence the price of newsprint.

Finally, the adjustment of the newsprint market to these disruptive market conditions will not be instantaneous or smooth. Because newsprint mills have very significant fixed costs and relatively smaller incremental costs, newsprint manufacturers may not be able to respond to declining demand by gradually withdrawing capacity. The market therefore can be expected to swing between periods of overcapacity and shortage as companies retire paper machines or entire paper mills. As these swings occur, there will not be smooth changes to the industry's overall capacity or its price levels. For example, while the price of newsprint has risen in the past six months, it is at the time of this filing at or below its lowest level in 2006 when input prices were lower. Further, the United States' investigation

has found that the price is so low that many newsprint producers' mills do not cover their costs. Indeed, the three mills that AbitibiBowater closed after the merger were unprofitable.

In summary, the NAA's conclusion that recent newsprint capacity closures and price increases necessarily are anticompetitive actions driven by the merger is misguided and fails to account for significant market facts affecting the supply and demand equilibrium of the North American newsprint market.

2. The United States Has Provided Sufficient Explanation of Why the Proposed Divestiture Is an Adequate Remedy to the Harm Alleged in the Complaint, and Entry of the Proposed Final Judgment Will Be in the Public Interest

The proposed Final Judgment provides an effective and appropriate remedy for the antitrust violation alleged in the Complaint, and its entry, therefore, will be in the public interest. The purpose of Tunney Act review is not for the Court to engage in an “unrestricted evaluation of what relief would best serve the public,”
BNS
, 858 F.2d at 462 (citing
Bechtel Corp.
, 648 F.2d at 666) or to determine the relief “that will best serve society,”
Bechtel Corp.
, 648 F.2d at 666. Instead, the purpose of Tunney Act review is simply to determine whether the divestiture of the Snowflake mill is within the reaches of the public interest, “even if it falls short of the remedy the court would impose on its own.”
AT&T
, 552 F. Supp. at 151. In other words, the purpose of Tunney Act review is to determine whether the divestiture is a “reasonably adequate” remedy for the harms alleged in the Complaint.
SBC Commc'ns
, 489 F. Supp. 2d at 17.

Subsections (A) and (B) of 15 U.S.C. 16(e)(1) set forth a number of factors for courts to consider when assessing the competitive impact of proposed final judgments. Many of those factors are not at issue here.
4

Instead, the second argument in the NAA's Comment focuses on the competitive considerations relevant to the proposed Final Judgment, the divestiture it requires and the alternatives the United States considered.

4
The NAA does not contest several factors listed for courts to consider under subsection (A). For instance, with respect to “provisions for enforcement and modification,” 15 U.S.C. 16(e)(1)(A), the proposed Final Judgment contains the standard provisions that have been effective in numerous other cases brought by the United States. In particular, the proposed Final Judgment provides that the Court retains jurisdiction over this action, and the parties may apply to the Court for any order necessary or appropriate for the modification, interpretation, or enforcement of the Final Judgment. With respect to “duration of relief sought,”
id.
, the proposed divestiture is permanent. Finally, with respect to “whether its terms are ambiguous,”
id.
, no term in the proposed Final Judgment is ambiguous.

The NAA questions whether the United States has adequately demonstrated to this Court that the divestiture eliminates AbitibiBowater's post-merger incentive to reduce capacity and raise prices to North American newsprint customers. It has. As explained previously, the United States conducted an extensive investigation and compiled comprehensive data on market shares, costs of production, estimations of rest-of-industry newsprint capacity and future reductions in newsprint demand gathered from public and non-public sources. This data was used in an economic model to determine if the merger would cause an anticompetitive increase in newsprint prices.
5

The United States concluded that a merger between Abitibi and Bowater, without a divestiture, would allow the merged firm to “close its capacity strategically, allowing the merged firm to raise newsprint prices and recoup its lost profits on the combined output.” (CIS at 8.) But, as the United States concluded in the CIS, “[d]ivesting Snowflake * * * will reduce the capacity over which the merged firm could profit to a level at which it would not have the ability to close capacity strategically.” (
Id.
) In other words, the United States' investigation found that without Snowflake, AbitibiBowater did not have enough newsprint capacity to benefit sufficiently from the post-merger price increase to offset the costs associated with shutting down profitable newsprint capacity.

5
To raise prices above competitive levels, the merged firm must create an artificial shortage by shutting down profitable newsprint mills. The merged firm has the incentive to follow this strategy when the costs of this strategy, which are the profits the merged firm forgoes by prematurely shutting down profitable newsprint mills, are less than its benefits, which are the increased prices the merged firm can expect to recoup across its remaining newsprint capacity. After completing its investigation, the United States concluded that without a divestiture AbitibiBowater would have the incentive to follow this strategy, that is, to create an artificial shortage by shutting down otherwise-profitable newsprint mills.

The NAA further contends that the United States “has left the Court entirely in the dark with absolutely no basis for making a meaningful comparison between a Snowflake-only divestiture and any alternative course of action, including a full trial on the merits.” (Comment at 18.) This is incorrect; in the CIS the United States addressed both alternatives. (CIS at 10-11.) As the United States noted in the CIS, a full trial on the merits would require significant time and expense, and the outcome would be uncertain. In light of such uncertainty, the United States' decision to take an adequate and available remedy and forgo the risk of trial is well within “the reaches of the public interest.”
See SBC Commc'ns
, 489 F. Supp. 2d at 23 (“Success at trial was surely not assured, so pursuit of that alternative may have resulted in no remedy at all. While a trial may have created an even greater evidentiary record, that benefit may not outweigh the possible loss of the settlement remedies. * * *”).

Similarly, the United States need not rehearse every permutation of possible divestiture in order to demonstrate to this Court that the divestiture of Snowflake would adequately address the competitive harm alleged in the Complaint. The competitive harm that the United States alleged—and that the NAA acknowledges—is AbitibiBowater's incentive and ability to raise newsprint prices above competitive levels in the North American market. Any divestiture that removes either the combined firm's incentive or its ability to raise prices above competitive levels would therefore be an adequate remedy. Given AbitibiBowater's ownership of all or part of 19 paper mills in the United States and Canada (
see
Complaint ¶¶ 7 & 8), the United States could have selected different mills, individually or in combination, to remove the merged firm's ability and incentive to raise prices anticompetitively. In this instance, considering all the factors—including the inherent advantages of settlement and avoidance of the risk and uncertainty of litigation
6

—the United States reasonably chose to require the divestiture of one of “the largest and most profitable newsprint mills in the United States,” which its analysis determined would deprive the merged firm of the scale needed to recoup its lost profits. (
See
CIS at 6, 11.) As discussed above, given the continuing decline in demand for newsprint, the United States anticipated that AbitibiBowater would continue to close inefficient newsprint capacity. (
See
Complaint at ¶ 17, CIS at 5.) The United States determined that, coupled with the exit from the market of such inefficient capacity, the divestiture of

the Snowflake mill will be sufficient to prevent AbitibiBowater from engaging in an anticompetitive closure of
efficient
capacity. Abitibi and Bowater, even before the merger, had the incentive to close money-losing mills. The question therefore is whether the merger somehow gave them the incentive to close profitable mills in order to raise prices above competitive levels. The United States determined that AbitibiBowater was not likely to have that incentive once it divested Snowflake.

6
As noted previously, when making its public interest determination, this Court “must accord deference to the government's predictions about the efficacy of its remedies, and may not require that the remedies perfectly match the alleged violations because this may only reflect underlying weakness in the government's case or concessions made during negotiation.”
SBC Commc'ns
, 489 F. Supp. 2d at 17.

Finally, the NAA suggests that the proposed Final Judgment should not be entered because Abitibi and Bowater previously had engaged in anticompetitive conduct of the sort alleged in the Complaint, which it alleges the United States did not properly account for in negotiating the proposed Final Judgment. This suggestion is misplaced for two reasons. First, as mentioned earlier, the United States spoke with a number of market participants, including the NAA, and examined historical data on prices and costs in the course of its investigation. The evidence does not support the NAA's claims that the parties' prior behavior was in fact anticompetitive. Second, the NAA's allegations about the parties' prior behavior are irrelevant because the prior behavior does not address whether, after Snowflake is divested, AbitibiBowater will have the incentive and ability to unilaterally raise price above competitive levels. (And as the United States has already explained, the answer to this question is likely to be “no.”)

Ultimately, in making its public interest determination, the district court “must accord deference to the government's predictions about the efficacy of its remedies.”
See SBC Commc'ns
, 489 F. Supp. 2d at 17. As already has been demonstrated, the United States' analysis supports the conclusion that divestiture of the Snowflake mill is an appropriate remedy to the harms alleged in the Complaint.

IV. Conclusion

The issues raised in the NAA's public Comment were among the many considered during the United States' extensive and thorough investigation. The United States has determined that the proposed Final Judgment as drafted provides an effective and appropriate remedy for the antitrust violations alleged in the Complaint, and is therefore in the public interest. The United States will move this Court to enter the proposed Final Judgment after the Comment and Response are published.

Respectfully Submitted,

Dated: April 18, 2008,

Karl D. Knutsen,

Ryan Danks,

Rebecca Perlmutter,

Michelle Seltzer (D.C. Bar No. 475482).

Trial Attorneys. United States Department of Justice, Antitrust Division, Litigation I Section, 1401 H St., N.W., Suite 4000, Washington, DC 20530, Telephone: (202) 514-0976, Facsimile: (202) 307-5802.

Certificate of Service

I hereby certify that on April 18, 2008, I caused a copy of the foregoing Response of Plaintiff United States to Public Comments on The Proposed Final Judgment in this matter to the following individuals by electronic mail:

Counsel for Defendant Abitibi-Consolidated Inc.

Joseph J. Simons, Esq., Paul, Weiss, Rifkind, Wharton & Garrison LLP, 1615 L Street, NW., Suite 1300, Washington, DC 20036-5694, Telephone: (202) 223-7370, Facsimile: (202) 223-7470, E-mail:
jsimons@paulweiss.com
.

Counsel for Defendant Bowater Incorporated

R. Hewitt Pate, Esq., Hunton & Williams, 1900 K Street, NW., Washington, DC 20006, Telephone: (202) 955-1921, Facsimile: (202) 857-3894, E-mail:
hpate@hunton.com
.

Counsel for the Newspaper Association of America

Alan L. Marx, Esq., King and Ballow, 1100 Union Street Plaza, 315 Union Street, Nashville, TN 37201, Telephone: (615) 726-5455, Facsimile: (615) 726-5413, E-mail:
amarx@kingballow.com
.

Karl D. Knutsen.

Comments of the Newspaper Association of America Regarding Proposed Final Judgment in United States of America v. Abitibi-Consolidated, Inc. and Bowater, Incorporated

In its Explanation of Consent Decree Procedures, the Justice Department requests the Court to enter the proposed Final Judgment settling
United States of America
v.
Abitibi-Consolidated, Inc. and Bowater, Incorporated
without a hearing “provided that the Court concludes that the Final Judgment is in the public interest.”
1

The main provision of the proposed Final Judgment is the requirement that the defendants divest Abitibi-Consolidated's Snowflake, Arizona newsprint mill in order to settle the Justice Department's Complaint
2

enjoining the proposed merger of Abitibi-Consolidated, Inc. (“Abitibi”) and Bowater, Incorporated (“Bowater”).
3

Shortly after the settlement agreement, Abitibi and Bowater completed their merger. The merged firm is named AbitibiBowater.
4

1
Plaintiff United States' Explanation of Consent Decree Procedures filed with the Court on October 23, 2007 at ¶ 6.

2
The Complaint and proposed Final Judgment were filed with the Court on October 23, 2007.

3
Proposed Final Judgment at pages 5-8.

4
Abitibi and Bowater completed their merger on October 29, 2007. AbitibiBowater press release, October 29, 2007.

The Newspaper Association of America (“NAA”) is an association whose membership includes most of the daily and Sunday newspaper publishers in the United States. NAA represents the newsprint customers most significantly affected by the merger of Abitibi and Bowater and the provisions of the proposed Final Judgment.

In its Competitive Impact Statement, the Justice Department asserts that the divestiture of the Snowflake mill “would adequately address the likelihood that the proposed merger substantially would reduce competition for newsprint in the United States.”
5

In its filings on this matter, including the Competitive Impact Statement and proposed Final Judgment, the Justice Department provides no information or analysis to the Court to support or justify this assertion.

5
Competitive Impact Statement at page 6. The Competitive Impact statement was also filed with the Court on October 23, 2007.

In these Comments, the NAA makes two separate but related arguments explaining why it believes the Court should reject the Justice Department's request to approve the proposed Final Judgment without a hearing. (1) The newly merged AbitibiBowater, despite its agreement to divest the Snowflake mill, has already begun to exercise the market power created by the merger to anticompetitively raise newsprint prices to North American newsprint customers. This post-settlement exercise of market power by AbitibiBowater shows that the proposed Final Judgment is not in the public interest. (2) Even without the post-settlement evidence of anticompetitive conduct by AbitibiBowater, there would still be ample grounds to reject the proposed remedy. The Justice Department has not provided the Court with any factual or economic analysis to demonstrate that the proposed remedy will eliminate the incentive for AbitibiBowater to reduce industry capacity and raise prices to North American newsprint customers (the injury charged in the Complaint). Each argument, standing on its own, provides sufficient grounds for the

rejection by the Court of the Justice Department's request to enter the proposed Final Judgment without a hearing.

If the proposed Final Judgment is entered without modification, the newly merged AbitibiBowater will have the ability and incentive to unilaterally engage in anticompetitive conduct to raise newsprint prices above competitive levels to U.S. daily newspapers and other North American newsprint customers. The Court should reject the Justice Department's request to enter the proposed Final Judgment and conduct a hearing into this matter to determine a remedy sufficient to prevent the harm to competition and the economic harm to U.S. daily newspapers and other North American newsprint customers that will otherwise result from the merger and from the inadequate divestiture remedy as contained in the proposed Final Judgment.

Analysis of the Competitive Impact of the Merger and the Adequacy of the Divestiture of the Snowflake Mill

On November 8, 2007, the Justice Department published in the
Federal Register
the Proposed Final Judgment resolving a Complaint filed by the United States to enjoin the merger of Abitibi and Bowater. The Complaint describes the acquisition as creating a newsprint producer “three times larger than the next North American newsprint producer” that “will have the incentive and ability to withdraw capacity and raise newsprint prices in the North American newsprint market.”
6

Prior to the merger, Abitibi was the largest producer with 25 percent of the North American newsprint capacity.
7

With Bowater's second place share of 16 percent, the combined firm would own “over 40” percent of the North American newsprint capacity.
8

The Complaint seeks to enjoin the transaction because it will “provide the merged firm with an incentive to close capacity sooner than it otherwise would to raise prices and profit from the higher margins on its remaining capacity.”
9

6
Complaint at ¶ 2.

7
Complaint at ¶ 7, 16.

8
Complaint at ¶ 8, 16.

9
Complaint at ¶ 19.

Newspaper publishers do not have alternatives to newsprint to turn to when newsprint prices rise. The Complaint states that “newspaper publishers have no close substitutes to use for printing newspapers,”
10

and that “demand for newsprint is highly inelastic to changes in price.”
11

Consequently, if North American newsprint manufacturers attempted to exercise market power by raising newsprint prices above competitive levels, U.S. newspaper publishers and other North American newsprint buyers could not successfully resist that exercise of market power.
12

Furthermore, U.S. newspaper publishers and other North American newsprint buyers would not be able to count on other suppliers to produce more newsprint or entry by new suppliers to roll back the price increase. According to the Complaint, “neither supply responses nor entry will defeat the exercise of market power.”
13

10
Complaint at ¶ 10.

11
Complaint at ¶ 11-12.

12
In Section 0.1 of the Horizontal Merger Guidelines, the Justice Department defines the exercise of market power by a seller or sellers as “the ability profitably to maintain prices above competitive levels for a significant period of time.” 1992 Horizontal Merger Guidelines, U.S. Department of Justice and Federal Trade Commission, Issued April 2, 1992 and revised April 8, 1997 (“Horizontal Merger Guidelines” or “Guidelines”). Available at
http://www.usdoj.gov/atr/public/guidelines/hmg.htm
.

13
Complaint at ¶ 20-26.

In recent years, the U.S. newspaper industry has experienced declining circulation and advertising revenue. As a result, North American demand for newsprint has also declined, leading to excess newsprint capacity. The decline in newsprint demand is projected to continue.
14

In such circumstances, newsprint prices would ordinarily be expected to also decline. According to the Complaint, however, the merger will give the merged firm both the incentive and ability to strategically close enough capacity to raise newsprint prices above competitive levels.
15

The Complaint also concludes that absent the merger, neither Abitibi nor Bowater as separate firms would have the incentive or ability to strategically close capacity to raise newsprint prices.
16

In the words of the Justice Department, the “merger will substantially lessen competition in the production and sales of newsprint,” with the result that “prices charged for newsprint in North America likely will increase.”
17

14
Complaint at ¶ 17.

15
Complaint at ¶ 2-3, 16.

16
Complaint at ¶ 18.

17
Complaint at ¶ 3, 16, 28(c).

In order to remedy the anticompetitive effects that the Justice Department concluded would otherwise result from the merger, the Department obtained the agreement of Abitibi and Bowater to divest Abitibi's Snowflake, Arizona newsprint mill.
18

In the Competitive Impact Statement, the Justice Department asserts that “[w]ithout Snowflake's capacity, the merged firm would not be of sufficient size to be able to recoup the losses from such strategic closures through increases in prices on its remaining newsprint production. The divestiture of Snowflake would adequately address the likelihood that the proposed merger substantially would reduce competition for newsprint in the United States.”
19

The Snowflake mill accounts for about 3 percent of North American newsprint capacity.
20

Thus, the Justice Department is claiming that with a newsprint capacity share of about 40 percent, the merged firm would have the incentive and ability to unilaterally exercise market power to raise newsprint prices above competitive levels but that with a slightly smaller capacity share of 37 percent the merged firm would not have the incentive and ability to unilaterally exercise market power. The Justice Department provides the Court with no data or analysis in support of these assertions.

18
Proposed Final Judgment at pp. 5-8, Competitive Impact Statement at pp. 8-11.

19
Competitive Impact Statement at p. 6.

20
Neither the Proposed Final Judgment nor the Competitive Impact Statement provides the North American newsprint capacity share of the Snowflake mill. At page 2, the Competitive Impact Statement states that the annual newsprint capacity of the Snowflake mill is 375,000 metric tonnes, which would be about 3 percent of current annual North American newsprint capacity of about 11.7 million metric tonnes based on November 2007 newsprint statistics provided by the Pulp and Paper Products Council.

The Justice Department's prediction that the Snowflake divestiture would be sufficient to eliminate the incentive and ability of the merged firm to exercise market power by strategically removing newsprint capacity from the market to raise the price of newsprint has already been proven wrong. North American newsprint producers, including Abitibi and Bowater, had been trying to implement a $25 per tonne price increase since September of this year. Until November, newspaper publishers were successful in resisting the price increase.
21

On November 29, a little more than five weeks after the agreement to divest the Snowflake mill, the newly combined AbitibiBowater announced that it would remove about 600,000 metric tonnes of newsprint capacity from the North American market, representing about 5 percent of North American newsprint capacity.
22

In conjunction with the capacity closures, AbitibiBowater initiated a newsprint price increase of $60 per metric tonne to be implemented in three $20 per metric tonne monthly increments beginning in January 2008. Most North American newsprint manufacturers quickly joined the $60 per metric tonne price initiated by AbitibiBowater.
23

Also, as a result of AbitibiBowater' s announced newsprint capacity closures of 600,000 metric tonnes, the previously stalled $25 per metric tonne price hike has been successfully implemented by North American newsprint manufacturers. As described in the trade press, “[p]ublisher resistance to $25/tonne North American newsprint increase collapse[d]” and the price hike went in “like a hot knife through butter,”
24

Combined, these two price increases will raise the price of newsprint by $85 per metric tonne or about 15 percent over the October 2007 price of $560 per metric tonne.
25

As RISI economist Kevin Conley concluded, “AbitibiBowater's capacity closures will obviously provide the upward pressure for an extended price recovery in 2008, as operating rates soar past the magic 95% threshold generally needed for prices to rise.”
26

21
Publisher resistance to $25/tonne North American newsprint increase collapses; producers looking to fast track recovery, 29 Pulp & Paper Week 48 (Dec. 17, 2007) at 1.

22
AbitibiBowater plans to shut down one million tonnes/yr of capacity in 1Q; expects more closures could follow in 2Q, 29 Pulp & Paper Week 46 (Dec. 3, 2007) at 1. A capacity closure of 600,000 metric tonnes would be about 5 percent of current annual

North American newsprint capacity of about 11.7 million metric tonnes based on November 2007 newsprint statistics provided by the Pulp and Paper Products Council. In addition to announcing the removal of 600,000 metric tonnes of newsprint capacity from the market, AbitibiBowater also announced the closure of about 400,000 metric tonnes of commercial printing paper capacity.

23
Most North American newsprint makers join $60/tonne 1Q 2008 hike, 29 Pulp & Paper Week 46 at 2.

24
29 Pulp & Paper Week 48 at 1.

25
Generally, if a merger creates market power resulting in a price increase of 5 percent or more, that price increase is considered to be “significant.” In Section 1.11 of its Merger Guidelines, the Justice Department states that in defining the relevant markets affected by a merger in most contexts it “will use a price increase of five percent lasting for the foreseeable future.” Horizontal Merger Guidelines at § 1.11. The October 2007 North American newsprint price is from 29 Pulp & Paper Week 45 (Nov. 19, 2007) at 3.

26
Newsprint giant AbitibiBowater embraces industry leadership, eyes $200/tonne North American newsprint price increase, 29 Pulp & Paper Week 47 at 5.

The combined AbitibiBowater is seeking to “leverage the North American (newsprint) price up to the price in Europe and not the other way around,” according to AbitibiBowater President and CEO David Paterson.
27

If AbitibiBowater is successful in “leveraging” the North American newsprint price up to the price of newsprint in Europe, that will result in a $200 per metric tonne price increase or about 36 percent over the North American price of $560 per metric tonne in October 2007.
28

At the time AbitibiBowater announced the removal of 600,000 metric tonnes of newsprint capacity from the market, it also announced that “more mills could close in Canada later [in 2008].”
29

Based on these statements and other statements by AbitibiBowater executives and past and current actions by AbitibiBowater and its predecessor companies, it is very likely that AbitibiBowater will close additional capacity in 2008 to “leverage” the North American newsprint price up to the newsprint price in Europe.

27
29 Pulp & Paper Week 47 at 1.

28

Id.
at 1, “Newsprint prices in Europe were close to $200/tonne higher than in the USA in November.”

29
29 Pulp & Paper Week 46 at 1.

These post-settlement actions by AbitibiBowater show that the Justice Department severely underestimated the risk that the merger posed to competition in the North American newsprint market and severely underestimated the incentive and ability of the merged firm to remove capacity from the market to raise the price of newsprint well above competitive levels. It is evident that a significantly larger divestiture is required to prevent the substantial anticompetitive price increases that are already occurring and will continue to occur as a result of the merger.

NAA Represents the Newsprint Customers Most Significantly Affected by AbitibiBowater's Exercise of Market Power

These comments are timely submitted pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 16(b)-(e) (known as the “Tunney Act”), on behalf of the Newspaper Association of America (“NAA”). NAA members are the primary purchasers of newsprint. NAA has approximately 2,000 members, representing a broad range of newspaper-related companies ranging from independent, small market, and family owned publishers to the large newspaper chains. These members account for approximately 90 percent of the paid daily and Sunday newspaper circulation in the United States. U.S. daily newspapers are the primary purchasers of newsprint produced by North American newsprint mills and account for about 80 percent of the newsprint consumed in the U.S. and about 70 percent of the newsprint consumed in North America.

Newsprint is an essential and irreplaceable input for newspapers. Because newsprint is second only to labor as a cost for newspapers, higher newsprint prices have a direct impact on the ability of newspaper companies to serve their customers, newspaper readers and newspaper advertisers. When confronted with newsprint price increases, newspapers are forced to restrict their use of newsprint by reducing their circulation, withdrawing from more distant geographic areas, ending editions, and reducing the size and number of pages published. The impact of these changes adversely impacts the interest of the public, with less news available in print to the millions of newspaper readers and less information available in print for the electorate. At price levels equal to the prevailing prices in Europe, $200 per tonne above the pre-settlement October 2007 price, some newspapers will be unprofitable and at risk of failure.

This memorandum and the attached Economic Analysis
30

are submitted as a comment on the Justice Department's Competitive Impact Statement and proposed Final Judgment settling the proposed merger of Abitibi and Bowater. The Economic Analysis addresses, in particular, the inadequacy of the Snowflake divestiture to prevent the competitive harm from the merger that is identified in both the Complaint and Competitive Impact Statement. The attached Economic Analysis references “An Economic Analysis of Competitive Effects of the Proposed Abitibi-Bowater Merger” (“White Paper”) and two Supplements to the White Paper, which were provided to the Justice Department during its investigation of the merger. The White Paper and two Supplements, which are attached to the Economic Analysis, address the recent history of anticompetitive conduct by Abitibi and Bowater and explain why a merger of Abitibi and Bowater, if permitted, would lead to a continuation of that anticompetitive conduct. Also cited throughout the Comment are trade press articles relating to post-settlement newsprint capacity removals announced by Abitibi-Bowater and resulting price increases, which are attached to this Comment.
31

30
See “An Economic Analysis of the Adequacy of the Snowflake Divestiture in the Settlement of
United States of America
v.
Abitibi-Consolidated, Inc. and Bowater, Incorporated.
”

31
See Attachment A: Trade Press Articles Relating to Post-Settlement Newsprint Capacity Removals Announced by AbitibiBowater and Resulting Newsprint Price Increases.

NAA members are the primary victims that the Complaint identifies as suffering competitive injury from the transaction and on whose behalf the Government seeks relief. NAA agrees with the Justice Department that the alleged harm to competition identified in the Complaint is accurate,

demonstrable, and unless adequately remedied, will cause significant economic harm to the U.S. newspaper industry. Indeed, NAA and its members produced documents, economic analyses, and other information to the Justice Department demonstrating the recent anticompetitive pricing and output history of the North American newsprint industry resulting from the joint dominant firm behavior of Abitibi and Bowater and showing how the proposed transaction would permit a merged AbitibiBowater to continue to strategically close capacity to raise newsprint prices well above competitive levels.

But while the Complaint correctly identifies the competitive harm produced by the merger, the remedy in the proposed Final Judgment fails to satisfy even the most deferential standard for Tunney Act review. The Justice Department has not provided the Court with any factual or economic analysis to demonstrate that the proposed remedy will eliminate the incentive to reduce industry capacity and raise prices to North American newsprint customers (the injury charged in the Complaint). Recent events have already proven that the remedy set forth in the proposed Final Judgment is woefully inadequate to prevent the injury charged in the Complaint. Hence, reviewing the remedy “in relationship to the violations that the United States has alleged in its Complaint,”
32

and deferring to the Justice Department to whatever extent is required by law, the remedy does not provide any basis to allow the Court to find that it will ameliorate the harm alleged in the Complaint. This is not a case in which there is a debate as to whether the Justice Department inappropriately narrowed the alleged harm. Rather, this is the case in which the economics and recent history of the newsprint industry, along with the Justice Department's conclusions regarding the competitive harm created by the consolidation, compel the conclusion that the remedy is not a “reasonably adequate remed[y] for the alleged harms.”
33

32
This is the standard the Justice Department claims is “the Court's role under the APPA.” Competitive Impact Statement, at Section VII.

33
This is the standard that the Justice Department contends it must meet for approval of the decree: “the United States ‘need only provide a factual basis for concluding that the settlements are reasonably adequate remedies for the alleged harms.’ ”
id.,
citing SBC Commc'ns, 489 F. Supp. 2d at 17.

The Proper Standard of Review for the Justice Department's Proposed Remedy for This Merger

“The antitrust laws [* * *] were enacted for the protection of competition, not competitors.”
34

This means that antitrust remedies are designed to restore competition to the market, not to ensure profits to the competitors in that industry.
35

Since the Supreme Court accepted this notion first proposed by Congress, antitrust law enforcement has been guided by this principle. Since these Supreme Court decisions and Congressional mandates, antitrust law and its regulators have sought to preserve competition “in the public interest.”
36

The divestiture of the Snowflake mill is a remedy that fails to preserve competition in the North American newsprint market and is, therefore, not in the public interest.

34

Brunswick Corp.
v.
Pueblo Bowl-O-Mat, Inc.,
429 U.S. 477, 488; 97 S. Ct. 690,712; 50 L. Ed. 2d 701 (1977), citing
Brown Shoe Co.
v.
United States,
370 U.S. 294, 320 (1962).

35
See Brunswick, 429 U.S. at 487-88 (In that case, the court would not grant relief to Respondents for profits that the Respondents would have gained had the acquired party exited the industry).

36
“In the public interest” is the standard for entry of proposed Final Judgments under the Tunney Act. 15 U.S.C. § 1 6(e)(1). Congress mandated considerations for determining whether a decree is in the public interest, but never defined the term, “in the public interest” itself. NAA believes that it is safe to assume that achieving the goals of the antitrust laws—including preserving competition—is “in the public interest.”

As is discussed in the attached Economic Analysis, the economic model appropriate to evaluate the current merger as well as prior anticompetitive conduct by Abitibi and Bowater is the dominant firm model.
37

The description of the anticompetitive effects of the merger contained in both the Complaint and the Competitive Impact Statement suggests that the Justice Department applied the dominant firm model in its analysis of the merger.
38

The Merger Guidelines Commentary of the Justice Department and the Federal Trade Commission describes the dominant firm model as follows:

37
See Section B.1., “Unilateral Effects and the Dominant Firm Model,” and Appendix A, “Merger Analysis, Unilateral Effects, and the Dominant Firm Model.”

38
Complaint at ¶ 16-19 and Competitive Impact Statement at pp. 5-6.

[The dominant firm] model posits that all competitors but one in an industry act as a “competitive fringe,” which can economically satisfy only part of total market demand. The remaining competitor acts as a monopolist with respect to the portion of total industry demand that the competitive fringe does not elect to supply. This model might apply, for example, in a homogeneous product industry in which the fringe competitors are unable to expand output significantly.
39

39
Commentary on the Horizontal Merger Guidelines, U.S. Department of Justice and Federal Trade Commission, March 2006 (“Guidelines Commentary”), at p. 25.

In the Competitive Impact Statement, the Justice Department claims that the divestiture of the Snowflake mill will be sufficient to eliminate the incentive for AbitibiBowater to act as a dominant firm.
40

However, the large post-settlement capacity closures accompanied by a large price increase initiated by AbitibiBowater shortly after the Justice Department's settlement demonstrate that AbitibiBowater has the incentive and ability to act as a dominant firm and will likely retain that incentive and ability for future strategic capacity closures.

40
Competitive Impact Statement at p. 6.

One consequence of AbitibiBowater's incentive and ability to act as the dominant firm in the North American newsprint market is that the merged firm will likely close at least some capacity that is more efficient than some of the capacity of the fringe firms.
41

The nature of the dominant firm model is that in closing capacity to raise the industry operating rate and newsprint prices, the dominant firm allows the fringe firms to operate at full capacity enjoying the price increasing benefits of AbitibiBowater's dominant firm behavior. Indeed, once they are at full capacity, the fringe firms would have no incentive to do anything other than to follow the price leadership of the dominant firm. Thus, in a declining market, such as the North American newsprint market, it is likely that some inefficient fringe firm capacity is preserved, which, in the absence of dominant firm behavior, would otherwise have to close as the price of newsprint dropped below the cash costs of operating the inefficient fringe capacity.

41
During the period 2002 to 2006, very little newsprint capacity was removed from the market by fringe firms as Abitibi and Bowater were responsible for the great majority of the North American newsprint capacity closures during this period. See the discussion of Abitibi's and Bowater's prior joint anticompetitive conduct below and in the attached Economic Analysis, Section B.2, “Abitibi and Bowater Engaged in Joint Dominant Firm Behavior to Raise NA Newsprint Prices Significantly above Competitive Levels 2002 to 2006,” which also contains references to the relevant portions of the White Paper and the Supplements to the White Paper.

For instance, Pulp & Paper Week reported that newsprint industry analyst Claudia Shank of JP Morgan believes that AbitibiBowater's announced capacity closures for the first quarter of 2008 “together with Abitibi-Bowater's

indication that it could cut more capacity in mid-2008, provided second- and third-tier producers some additional ‘breathing room’ and limit closures from the broader industry before the second half of next year.”
42

According to RISI economist Kevin Conley, “[w]ithout AbitibiBowater's bold move [to remove 600,000 metric tonnes of newsprint capacity from the market] operating rates and prices would have continued to languish at low levels until the highest-cost mills could no longer survive, eventually leading to the inevitable closures needed to balance the North American market.”
43

Even after the competitive “balancing” of the North American newsprint market, however, the prevailing newsprint price would be the competitive price, not the much higher anticompetitive prices resulting from AbitibiBowater's current and likely future strategic newsprint capacity closures.

42
29 Pulp & Paper Week 46 at 5.

43
29 Pulp & Paper Week 47 at 5.

On the other hand, if the Justice Department had successfully blocked this merger, a separate Abitibi and Bowater would likely have considerably less incentive and ability to engage in joint dominant behavior than the current merged AbitibiBowater.
44

The principal effect of the merger is that U.S. newspaper publishers and other North American newsprint customers directly bear the cost of the dominant firm behavior in the form of significantly higher newsprint prices. As a secondary effect of the merger, it is likely some inefficient fringe firm capacity may be preserved by AbitibiBowater's dominant firm behavior. The misallocation of resources that likely results imposes a social cost on the economy that is inconsistent with the goals of the antitrust laws.

44
According to p. 6 of the CIS, “But for the merger, neither Defendant acting alone would be of sufficient size to profitably increase the price of newsprint by reducing its own output through strategically closing, idling, or converting its capacity.”

The basic premise of the antitrust laws is to protect competition and consumers, not competitors. As interpreted by the courts and by Congress, the antitrust laws are not intended to protect inefficient suppliers to a market. Because the Justice Department is asking the Court to enter a proposed consent decree that would provide no remedy for the customer-victims of AbitibiBowater's dominant firm behavior and that would likely permit the survival of inefficient capacity of fringe firm competitors that would otherwise be forced to close down in a competitive newsprint market, the Justice Department has an obligation to explain the basis for its decision to the Court. By asking the Court to accept with no further analysis or explanation the Department's claim that the Snowflake divestiture will remedy the competitive harms alleged in the Complaint, the Department puts the Court in the position of having no basis upon which to determine if the proposed remedy (a) is adequate to address these competitive problems, (b) is consistent with the Justice Department's own prior positions, or (c) is in accordance with the well established standards of the antitrust laws, all of which are relevant to the determination of “public interest.”

The Complaint and Competitive Impact Statement Ignore Abitibi's and Bowater's Recent History of Anticompetitive Conduct Prior to Their Merger Announcement

As is discussed above, shortly after Abitibi and Bowater reached their agreement with the Justice Department in October to divest the Snowflake mill and settle the case, the newly merged firm proceeded to announce significant capacity closures and to initiate a substantial price increase. Most other North American newsprint manufacturers quickly matched AbitibiBowater's announced price increase.

During and immediately prior to the period when the merger was being reviewed by the Justice Department,
45

newsprint prices steadily declined from $675 per metric tonne to $560 per metric tonne, a decline of about 17 percent. Also, during this time, Abitibi and Bowater did not take strategic actions to raise the price of newsprint. As discussed immediately below, Abitibi and Bowater had engaged in joint dominant firm behavior to strategically close capacity to raise the price of newsprint well above competitive levels over the period 2002 to 2006. There are two plausible explanations as to why Abitibi and Bowater did not continue their joint dominant firm behavior during and immediately prior to the Department's merger review: (1) Abitibi and Bowater determined, due to the extent of previous capacity closures that occurred between 2002 and 2006, that their ability and incentive to jointly engage in dominant firm behavior had been significantly diminished, thus leading to their decision to merge; and (2) Abitibi and Bowater decided it would be imprudent to attempt to exercise market power during the merger review period as it might adversely affect the outcome of that review.

45
Abitibi and Bowater announced their merger on January 29, 2007. Presumably, the Justice Department began their review of the merger shortly after the merger announcement and continued their investigation until the filing of the Complaint, Competitive Impact Statement, and proposed Final Judgment on October 23, 2007.

Between 2002 and 2006, the pricing analysis in the White Paper demonstrates that Abitibi and Bowater jointly acted as a dominant firm, strategically removing newsprint capacity from the market to significantly raise the newsprint industry operating rate, and, thus, increasing the price of newsprint above competitive levels. Due to these strategic capacity closures, the price of newsprint during that period increased by a total of 49 percent despite a steady decline in consumption by North American newsprint customers. The economic White Paper and the two Supplements, presented to the Justice Department during the course of its investigation, extensively document and analyze this joint dominant firm behavior by Abitibi and Bowater.
46

The prior anticompetitive actions of Abitibi and Bowater to close capacity strategically during this four-year period are identical to the anticompetitive strategic behavior alleged in ¶ 2 and ¶ 19 of the Complaint and described on page 6 of the Competitive Impact Statement. Since the Complaint and Competitive Impact Statement contain no references to this prior anticompetitive conduct by Abitibi and Bowater, it is impossible for the Court to determine if and how much of a factor the prior anticompetitive conduct played in the Justice Department's evaluation and settlement of this merger.

46
See Section B.2. of the attached Economic Analysis.

Earlier mergers in the North American newsprint industry, especially the Abitibi-Donohue merger in 2000 and the Bowater-Alliance merger in 2001, created both the incentive and ability for Abitibi and Bowater to jointly engage in this anticompetitive conduct. Economic analysis in papers and presentations by representatives of NAA and the U.S. newspaper industry submitted to the Justice Department in 2000 and 2001 forecasted that these two mergers, if not challenged, would have significant anticompetitive results. The Justice Department took no action against either of these two earlier mergers and, as predicted by the economic analyses submitted to the Department, the two mergers enabled Abitibi and Bowater to engage in the anticompetitive conduct that occurred

between 2002 and 2006. As a result, U.S. newspapers and other North American newsprint customers incurred significantly higher newsprint prices.

Prior anticompetitive conduct is a highly relevant factor in most merger investigations, according to the Guidelines Commentary:

Facts showing that rivals in the relevant market have coordinated in the past are probative of whether a market is conducive to coordination. Guidelines § 2.1. Such facts are probative because they demonstrate the feasibility of coordination under past market conditions. Other things being equal, the removal of a firm via merger, in a market in which incumbents already have engaged in coordinated behavior, generally raises the risk that future coordination would be more successful, durable, or complete.
47

47
Guidelines Commentary at p. 22.

The Complaint, Competitive Impact Statement, and Proposed Final Judgment do not contain any explanation by the Justice Department as to what, if any, consideration was given to the evidence of Abitibi's and Bowater's prior joint anticompetitive conduct. Before determining whether the proposed relief “is in the public interest,” the Court is entitled to know whether the Justice Department considered evidence of prior anticompetitive conduct and if not, why not. By failing to provide that evidence in its Court filings, the Justice Department has deprived the Court of information vital to its review of the adequacy of the proposed divestiture.

The Competitive Impact Statement and Proposed Final Judgment Fail To Address the Congressional Mandates of the Tunney Act

As previously noted, the Tunney Act requires that a court determine whether entry of the proposed Final Judgment “is in the public interest.”
48

As the Justice Department outlines more thoroughly in its Competitive Impact Statement, the Court is required to consider certain factors in making that determination.
49

Among those considerations mandated by Congress are: (1) “The competitive impact of such judgment, including * * * anticipated effects of alternative remedies actually considered,” and (2) the “impact of entry of such judgment upon competition in the relevant market or markets.”
50

While evidence of other factors upon which the Court is asked to base its decision are certainly lacking, these two points are noticeably deficient.

48
15 U.S.C. § 16(e)(1).

49
Competitive Impact Statement at VII, citing 15 U.S.C. § 16(e)(1)(A)-(B),
United States
v.
SBC Commc'ns, Inc.
, 489 F. Supp. 2d 1, 11 (D.D.C. 2007).

50
15 U.S.C. 16(e)(1)

The Anticipated Competitive Effects of Alternative Remedies Actually Considered by the Justice Department

The Justice Department lists two alternative remedies to the one it chose: (1) A full trial on the merits, and (2) “a number of divestiture alternatives.”
51

After considering other options, the Justice Department “determined that divestiture of the Snowflake mill, under the circumstances, was the best solution given the size and efficiency of the Snowflake mill.”
52

Other than noting that Snowflake is “among the largest and most profitable mills in the United States,” the Justice Department provided no further explanation for its decision that Snowflake was both a sufficient remedy and the best solution, no detail regarding under what “circumstances” this conclusion was reached, and no scale against which it measured Snowflake as the best alternative. The Justice Department leaves the Court entirely in the dark as to what other divestitures it considered and why those were inferior to the divestiture of Snowflake. The Justice Department also failed to note why Snowflake alone—without an additional divestiture—was sufficient. While a detailed rank or scoring of each of the remedies the Justice Department considered may not be necessary, the Justice Department here has left the Court entirely in the dark with absolutely no basis for making a meaningflul comparison between a Snowflake-only divestiture and any alternative course of action, including a full trial on the merits.

51
Competitive Impact Statement at VI.

52

Id.

Critically, the Justice Department also failed to account for the actual “anticipated effects” of the alternatives. Determining “anticipated effects,” such as whether a transaction will result in one firm having the unilateral power to profitably raise prices or close capacity without being restrained by other competitors in the market, or whether a transaction will result in the market becoming more conducive to competitors coordinating on price, is the essential element of any merger investigation. Yet, here, even though the Court is required to consider it, the Justice Department remains silent. How can the Court determine if the Justice Department chose an acceptable alternative as opposed to one so weak as to provide no meaningful relief? Is the Court expected to take on faith that this alternative is a viable one? The Court is given no support that would assist it in reaching a conclusion that the Justice Department's chosen alternative is in the public interest. If the recent actions by AbitibiBowater are placed on the scale, the Justice Department's silence fails to meet any reasonable burden of proof to establish that its chosen alternative is sufficient to meet the standard that the proposed remedy is “in the public interest.”

The Impact of the Proposed Final Judgment in the Relevant Market

The divestiture required under the proposed Final Judgment fails to restore the competition lost by the combination of North America's two largest newsprint producers.

The Justice Department has an obligation to explain to the Court why the remedy it proposes restores or preserves competition. The formal policy guidance of the Antitrust Division regarding merger remedies is contained in the Antitrust Division Policy Guide to Merger Remedies.
53

In this policy statement, the Antitrust Division sets forth broad principles that it says guide its decisions to seek remedies to offset potential harms to competition from mergers. A controlling policy principle is that “restoring competition is the ‘key to the whole question of antitrust remedy.’ ”
54

53
Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division, October 2004. Available at
http://www.usdoj.gov/atr/public/guidelines/205108.htm
.

54

Id.
, citing
United States
v.
E.I. du Pont de Nemours & Co.
, 366 U.S. 316, 326 (1961).
Ford Motors Co.
v.
United States
, 405 U.S. 562, 573 (1972) (“relief in an antitrust case must be effective to redress the violations and ‘to restore competition’ * * * ”).

The Horizontal Merger Guidelines “describe the analytical framework and specific standards normally used by the [Justice Department] in analyzing mergers.”
55

While the Complaint and Competitive Impact Statement do not directly reference the Guidelines, absent a disclaimer from the Justice Department, the Court can fairly assume the Department followed its own Guidelines in its investigation of this merger.

55
1992 Horizontal Merger Guidelines, U.S. Department of Justice and Federal Trade Commission, Issued April 2, 1992 and revised April 8, 1997 (”Guidelines”). Available at
http://www.usdoj.gov/atr/public/guidelines/hmg.htm
. The Guidelines also say that, “By stating its policy as simply and clearly as possible, the [Justice Department] hopes to reduce the uncertainty associated with enforcement of the antitrust laws in this area.”
Id.
The “unifying theme of the Guidelines,” like the Merger Remedy Policy noted above, “is that mergers should not be permitted to create or enhance market power or to facilitate its exercise.”
Id
at § 0.1.

The Guidelines identify two analytical frameworks for assessing

whether a merger between competing firms may substantially lessen competition. Those frameworks require the Justice Department to ask whether the merger may increase market power by facilitating coordinated interaction among rival firms (“coordinated effects”) and whether the merger may enable the merged firm to raise price unilaterally or otherwise exercise market power (“unilateral effects”).
56

Though the Justice Department provides the Court with no indication of what framework it applied or why, the allegations in the Complaint appear to be consistent with the application of the unilateral effects framework.

56
Guidelines Commentary at p. 17.

A merger may diminish competition because the “merging firms may find it profitable to alter their behavior unilaterally following the acquisition by elevating price and suppressing output.”
57

How a merger generates anticompetitive unilateral effects is relatively straightforward: “The merger provides the merged firm a larger base of sales on which to enjoy the resulting price rise and also eliminates a competitor to which customers otherwise would have diverted their sales.”
58

57
Merger Guidelines at § 2.2.

58
Merger Guidelines at § 2.22.

The Complaint states that the combined post-merger share of newsprint held by AbitibiBowater is “over 40 percent.”
59

The Complaint also states that “neither supply responses nor entry will defeat an exercise of market power.”
60

The Complaint further states that “[t]he proposed transaction would combine Defendants' large share of newsprint capacity, thereby expanding the quantity of newsprint sales over which the merged firm would benefit from a price increase. This would provide the merged firm with an incentive to close capacity sooner than it otherwise would to raise prices and profit from the higher margins on its remaining capacity.”
61

59
Complaint at ¶ 16.

60
Complaint at ¶ 20-26.

61
Complaint at ¶ 19.

Given these market circumstances, which are highly conducive to the unilateral exercise of market power, the Justice Department fails to explain to the Court why the divestiture of just the Snowflake mill will be sufficient to prevent the merged firm from exercising market power. As noted above, the Snowflake mill represents only 3 percent of North American newsprint capacity. The divestiture of the Snowflake mill would reduce AbitibiBowater's North American newsprint capacity share from about 40 percent to about 37 percent. The Justice Department fails to explain to the Court how reducing AbitibiBowater's capacity share from 40 percent to a slightly smaller share of 37 percent, a difference of 3 percent, will be sufficient to restore the market to competitive conditions. In the absence of a convincing explanation, the Court should reach the conclusion that the Justice Department's assertion that the divestiture of the Snowflake mill will be sufficient to prevent unilateral anticompetitive conduct by AbitibiBowater is simply wrong.

A Previous Application of the Guidelines by the Justice Department to a Comparable Paper Industry Merger Resulted in a Much Larger Divestiture Than the Department Has Proposed for This Merger

In the Justice Department's November 2000 challenge to Georgia-Pacific's proposed acquisition of Fort James Corporation, the two parties were the two largest producers of “away-from-home” tissue products. Georgia-Pacific's capacity share of “away-from-home” parent tissue rolls was 11 percent and Fort James' capacity share was 25 percent. The combined share of the two companies in the “away-from-home” parent tissue roll market would have been 36 percent. The Justice Department challenged the merger using the same basic theory applied here—unilateral effects. The Justice Department's investigation revealed that the industry was operating at nearly full capacity, that the capacity could not be quickly expanded, and that demand for parent rolls was relatively inelastic with respect to price. These factors combined to create the likelihood that, after the merger, Georgia-Pacific would act as a dominant firm by restricting output of parent rolls and thereby forcing up prices for away-from-home tissue products. As a result, the Justice Department settled the case by a consent decree requiring the complete divestiture of Georgia-Pacific's parent tissue roll capacity share of 11 percent.
62

62

See
Competitive Impact Statement describing DOJ's Complaint and settlement of the proposed Georgia-Pacific/Fort James merger at pp. 8-10. For copies of the DOJ's Complaint and Competitive Impact Statement in this matter see the Justice Department Web site at
http://www.usdoj.gov/atr/cases/indx276.htm.

Nothing in the Competitive Impact Statement for the AbitibiBowater merger explains or even suggests to the Court why a divestiture comparable to that in the Georgia-Pacific/Fort James merger is not required for this merger.
63

AbitibiBowater's post-merger actions have already shown that the divestiture remedy proposed by the Justice Department for this merger will not prevent the exercise of market power.

63
The complete divestiture of Georgia-Pacific's pre-acquisition capacity share reduced Georgia-Pacific's post-acquisition parent tissue roll capacity share to 25 percent. With respect to the Abitibi-Bowater merger, a comparable divestiture would reduce the combined pre-merger newsprint capacity share of “over 40 percent” to 25 percent.

The Justice Department's action in the Georgia-Pacific/Fort James merger strongly suggests that significantly more capacity needs to be divested by AbitibiBowater to ensure that the merged firm will not have the incentive and ability to unilaterally exercise market power.

Conclusion

U.S. newspaper publishers, the primary victims who will bear the cost of the conduct challenged in the Complaint and the inadequate Snowflake mill divestiture, see the proposed divestiture as ineffective and inadequate. The Justice Department has not provided the Court with sufficient information with which the Court can enter an informed judgment that the remedy proposed by the Justice Department is “in the public interest.” Furthermore, events subsequent to the Justice Department's settlement of the Abitibi-Bowater merger have already demonstrated that the proposed Final Judgment does not remedy the public interest harms presented to the Court in the Complaint.

The Court should not enter the proposed Final Judgment. NAA requests that the Court conduct a hearing to determine the amount of divestiture sufficient to prevent the anticompetitive effects that will otherwise result from this merger and the inadequate proposed Final Judgment.

Submitted on behalf of the Newspaper Association of America by Alan L. Marx, King & Ballow, Union Street Plaza 1100, 315 Union Street, Nashville, TN 37201, (615) 259-3456,
amarx@kingballow.com
. January 2, 2008.

Attachment A—Trade Press Articles Relating to Post-Settlement Newsprint Capacity Removals Announced by AbitibiBowater and Resulting Newsprint Price Increases

Pulp & Paper Week

Dec. 3, 2007 | Vol. 29, No. 46

AbitibiBowater Plans to Shut Down One Million Tonnes/yr of Capacity in 1Q; Expects More Closures Could Follow in 2Q

AbitibiBowater unveiled the first phase of its long-awaited post-merger rationalization plan and announced the closure of four money-losing mills in Canada in the first quarter 2008. A total of 600,000 tonnes/yr of newsprint capacity and 400,000 tonnes/yr of commercial printing papers will be removed.

AbitibiBowater said more mills could close in Canada later next year, and added that it wanted to reopen its Canadian union contracts to “explore ways to reduce overall labor costs and provide enhanced flexibility in the workplace.” Salaried employees would also be asked to take cuts.

Under what it called “phase one of an action plan to address company challenges,” AbitibiBowater will permanently close its Belgo mill in Shawinigan, QC, and Dalhousie, NB, mill, and indefinitely idle its Donnacona, QC, and Mackenzie, BC, paper mills.

Additionally, the company will permanently close its previously idled Fort William mill in Thunder Bay, ON, and Lufkin, TX, paper mills, as well as paper machine 3 at its Gatineau, QC, mill. The previously idled operations run total capacity of about 650,000 tonnes/yr.

Execution is key. “(AbitibiBowater) has done what I expect them to do and be really aggressive, but the issue is going to be execution,” said one newsprint buyer contact with a major U.S. publishing group. “It is going to be impossible to take out 600,000 tonnes on Jan 1 and people will be looking to see how much comes out in February and March. That will be the test.”

The reaction from Wall Street analysts was broadly favorable. Citibank analyst Chip Dillon said the newsprint capacity reduction figure was double his expectations. JPMorgan's Claudia Shank said that while she believes another 300,000 tonnes/yr would need to come out next year, the closures, together with AbitibiBowater's indication that it could cut more capacity in mid 2008, provided second- and third-tier producers some additional “breathing room” and limit closures from the broader industry before the second half of next year.

“AbitibiBowater will probably say ‘We've done our part’ to get ahead of the curve and gain momentum on the pricing front,” an analyst in Canada said. “But the market is looking for a million tonnes (of newsprint reductions) year-over-year so more capacity will have to be taken out if the market is going to be in balance in 2008.”

While AbitibiBowater did not disclose the number of jobs that would be lost by its restructuring, the Communication, Energy and Paperworkers Union of Canada (CEP) estimated at least 1,000 workers could be eliminated in Canada.

CEP wants forestry “summit.” The CEP called for an emergency summit of union and industry leaders in the forestry sector.

“Today's 1,000 or more victims in the mills in Dalhousie, Shawinigan, Donnacona, and Mackenzie bring the job losses in the sector to over 20,000 in the past two to three years,” said CEP pres Dave Coles.

AbitibiBowater pres/CEO David Paterson said management had been very transparent with employees about their mills.

Under phase two of the plan, which starts immediately, AbitibiBowater will continue reviewing all operations.

More Canadian mills at risk. Company chmn John Weaver said several mills in eastern Canada were under particular pressure from high fiber, energy, and labor costs, and the company planned to involve government, communities, and labor to make the mills competitive at dollar parity. Decisions would be taken in the second quarter of 2008 and closures could start by mid-2008, he said.

AbitibiBowater has increased its merger synergies target to $350 million from $250 million. It is also targeting another $500 million in asset sales, which could include overseas mills, non-core facilities, U.S. timberlands, and its Snowflake, AZ, newsprint mill, which it agreed to divest in return for U.S. Dept of Justice approval of the Abitibi-Consolidated/Bowater merger.

Proceeds from the sales will go towards the company's three-year, $1-billion debt-reduction target.

• Citing rising costs and “difficuit market conditions,” AbitibiBowater told customers that it would increase prices on its AbiBow high-bright product line by $65/ton effective Jan. 1. The increase applies to all basis weights, calipers, and finishes of Book, Book Cream, Select, Sert, and Form products. Separately, Blue Heron announced a $35/tonne ($31.75/ton) high-bright increase for its reBrite product range, also effective Jan. 1.

Newsprint

Most North American Newsprint Makers Join $60/Tonne 1Q 2008 Hike

U.S. daily newspaper publishers face a New Year's perfect storm, with producers who account for more than 80% of North American production slating $60/tonne first quarter price hikes and AbitibiBowater closing 600,000 tonnes/yr of newsprint capacity, contacts said last week.

The price increases will be phased in monthly increments of $20/tonne in January, February and March.

AbitibiBowater, which with 5.7 million tonnes/yr of capacity accounts for about 45% of all North American newsprint production, initiated the hike.

Among companies that contacts said would keep prices consistent with AbitibiBowater are White Birch, Kruger, SP Newsprint, Catalyst, Tembec, and Blue Heron. Other producers are still considering a price hike, contacts said last week.

In addition to the 1Q 2008 hike almost all North American newsprint producers will seek this month to implement a $25/tonne fall increase that many producers have been trying to apply since September.

Publishers start to panic. “There is a general panic in the market right now. Supply has tightened up and (producers) are really pushing this December hike. I'm sure there are (publishers) who have been particularly aggressive in the past that are going to get stuck and be told to pay or buy somewhere else,” said one publisher contact.

One contact with a large supplier said the $25 hike had managed to gain traction in November. “Things happened in the back half of the month” buying sources conceded, saying that newsprint producers did have the strength to move November's price “a little bit.”

Pulp & Paper Week's November Price Watch had showed newsprint prices on U.S. East and West coasts holding flat at $560/tonne.

Suppliers are in dire need for higher prices given the current 10.4% year-to-date decline in North American demand, strong Canadian dollar and high input costs.

“I've never before seen such a confluence of bad things on this side of the business. To save a dollar on production is a Herculean task,” said one producer contact in Canada.

Sign of modest improvement. According to the latest Pulp and Paper Products Council data, the North American supply-demand balance improved modestly in October, with production falling almost in line with overall demand.

The biggest barometer for newsprint consumption, the U.S. dailies, showed an 11.4% fall. But adjusting for four Sundays in October 2007 compared with five in October last year, the decline was closer to 7-8%.

More significantly, overall inventories fell to 1.13 million tonnes, their lowest level since December 1979, after a two-month 242,000 tonnes or 18% plunge. Exports rose 29.0% in October, but those extra 49,000 tonnes were more than offset by a 69,000 tonnes drop in domestic shipments.

Gloomy economic outlook. With the economy sagging and the outlook for newspaper advertising looking increasingly gloomy, contacts say capacity cuts remain the only answer if mills are going achieve the 95% operating rates that historically lead to higher prices.

RISI economists say that despite higher exports, North American mills will have to shut 800,000 tonnes/yr of capacity by the end of next year (relative to third quarter 2007) if they are to push operating rates above the 95% mark in 2008.

• With plans to eliminate 38,000 tonnes of newsprint production, Catalyst Paper last week extended the shutdown of PM 1 at its Elk Falls newsprint mill in Campbell River, BC, and keep the PM down for the entire first quarter because of a shortage of fiber. PM 1 was shut in September due to a fiber shortage. The company said the mill has been hurt by a coastal fiber strike that recently ended and a weak U.S. lumber market, Canadian Press said. In addition, the mill's kraft pulp line and white-top linerboard PM will also shut 18 days between Dec. 16 and Jan. 2—and could be shut for longer periods depending on fiber availability. PMs 2 and 5 will be shut Dec. 23, and restart Jan. 2 and Jan. 6, respectively.

• Japan's Oji Paper plans to hike the price of newsprint exports by $50/tonne effective

with December orders, citing higher energy and raw material prices that will add $460 million to its costs in the current financial year. The company will also hike the price of other export grades, ranging from $30/tonne for coated and uncoated products to $80/tonne for kraft paper.

• Germany's Palm Paper received planning permission to construct a 400,000 tonnes/yr recycled newsprint mill at King's Lynn in eastern England, which would expand Palm's UK production to 550,000 tonnes/yr. Ecco Newsprint, which has plans for a recycled mill of its own at Middlesbrough in the north of the country, also has planning permission but has not yet begun construction. The UK currently imports about 1.2m tonnes of newsprint and exports 1.5m tonnes of waste paper annually.

BILLING CODE 4410-11-M

EN10JN08.000

BILLING CODE 4410-11-C
Dec. 10, 2007 | Vol. 29, No. 47

Newsprint Giant AbitibiBowater Embraces Industry Leadership, Eyes $200/Tonne North American Newsprint Price Increase

Any doubts about AbitibiBowater's determination to regain profitability and retire a billion dollars in debt within three years were dispelled last week when pres/CEO David Paterson told analysts at the Citi Investment Research Basic Materials Symposium: “Our need is to leverage the North American (newsprint) price up to the price in Europe and not the other way around.”

Newsprint prices in Europe were close to $200/tonne higher than in the USA in November.

AbitibiBowater, the worlds largest newsprint maker, accounts for about 45% of all North American newsprint production capacity.

Paterson said the company's $25/tonne fall price increase was in place, and he anticipated that the company's recently announced $60/tonne first quarter hike would be implemented entirely.

A presentation slide showed the effect of a $25/tonne increase was an additional $126.8 million in operating income.

The benefit to AbitibiBowater's bottom line from shuttering loss-making Canadian newsprint capacity was explained by CFO William Harvey, who said production costs for the entire 600,000 tonnes/yr slated for closure were $60/tonne higher than the company average.

Most North American producers expect the closures to save the struggling North American newsprint industry, and have joined AbitibiBowater's call for a $60/tonne increase in the first quarter of 2008 implemented in three $20/tonne monthly increments.

Upward price pressure. “AbitibiBowater's capacity closures will obviously provide the upward pressure for an extended price recovery in 2008, as operating rates soar past the magic 95% threshold generally needed for prices to rise,” said senior RISI economist Kevin Conley. “Without AbitibiBowater's bold move, operating rates and prices would have continued to languish at low levels until the highest-cost mills could no longer survive, eventually leading to the inevitable

closures needed to balance the North American market.”

European producers are also addressing overcapacity, and Europe's largest newsprint producer, Norske Skog, said that it would decide by Feb. 7 how to permanently close 300,000-400,000 tonnes/yr of newsprint capacity.

“We now see 1.4 to 1.5 million tonnes of announced capacity removals in Europe and North America in just the past 10 weeks,” said Citi analyst Chip Dillon, who told investors in a research note that he expected a recovery in U.S. newsprint prices to close almost all of the gap with European prices over the next 12-18 months.

Dismaying prospect for publishers. What a $60/tonne hike and imminent closure of 5% of North American newsprint capacity portends for U.S. daily newspapers had publishers shaking their heads.

“There is a sense of inevitability that seems to be recognized by most on the publishing side. There's a sense of resignation in their voices that hasn't been there before,” said one contact with a major metropolitan daily.

“It's a very different world from just a month ago. We certainly did not have these kind of increases in our plans for 2008, so if they are implemented we would have to find ways to use less newsprint,” said another contact with a major publishing group.

Newspaper publishers have their own business issues which have largely brought about the decline in North American newsprint demand to under nine million tonnes in 2007, from a peak of slightly more than 13 million tonnes in 1999 and more than ten million tonnes as recently as 2005.

Only 2.9% of the 11.4% drop in North American newsprint demand this year is due to lighter basis weights and reduced web widths, according to the Pulp and Paper Products Council. Of the rest, 2.2% is attributed to falling circulation and 6.3% to lost advertising. The bulk of the lost advertising is in real estate and automotive sectors, neither of which show signs of a rebound anytime soon.

2008 a challenging year. “From a fiscal standpoint 2008 will be a challenging year almost without precedent for publishers. It's an alignment of circumstances and realities that none of us have ever seen before,” said one publishing source.

But while the domestic market for newsprint is undeniably shrinking, the global market is still growing. Industry consultant Dave Allan told RISI's 2nd annual Latin American Pulp & Paper Outlook Conference in Sao Paulo, Brazil, last week that world demand showed flat growth in 2007 only because of North America's 10% plunge.

Allan said he expected North American demand decline would slow to 2.5% by the end of 2008, and that global demand would see a 2%/yr upturn and grow at close to 1.0 million tonnes/yr in 2008 and 2009.

AbitibiBowater, which like some other North American producers is growing its overseas exports, sees its key destinations as Europe, Latin America and the Middle East and India. Chmn John Weaver said last week that because the company's Canadian export mills were located on ocean ports, the cost of bulk shipments to Europe were comparable with shipments to North American destinations.

• Members of Canada's largest pulp and paper union, the Communications, Energy & Paperworkers union (CEP) want to go to the bargaining table a year earlier than scheduled to tackle the issue of mill closures and job losses. The measure was adopted last week by delegates representing AbitibiBowater paper workers and will go to a conference of eastern Canada union Locals early next year. The CEP opposes reopening negotiated contracts to cut wages and benefits but says there are ways the union could help cut costs that do not involve concessions.

Dec. 17, 2007\Vol. 29, No. 48

Publisher Resistance to $25/Tonne North American Newsprint Increase Collapses; Producers Looking To Fast Track Recovery

Trenchant publisher resistance to a $25/tonne fall newsprint price increase that persisted as late as mid-November vanished toward the end of the month, and the hike went in “like a hot knife through butter” in December, sources said last week.

Contacts said the market was tightening and order books filling up due to some newspaper buyers trying to stock up ahead of next year's fresh round of price increases and some commercial printers switching to newsprint because of a shortage of specialty grades.

The price of 30-lb standard newsprint on the U.S. East and West Coasts increased to $585/tonne this month, up $15 from a revised $570/tonne in November, according to Pulp & Paper Week. The revised November level represented a $10/tonne increase. The price of 27.7 lb newsprint was $625/tonne in December, up from $610/tonne in November.

Newspaper publishers' rapid change of heart came after the combination of AbitibiBowater's larger than expected 600,000 tonnes/yr of newsprint capacity cuts along with a $60/tonne first quarter price increase, contacts said. Analysts believe the closures remove sufficient newsprint capacity to match North American market demand—at least temporarily—in the first quarter.

70% 1Q price recovery? AbitibiBowater accounts for about 45% of all North American newsprint capacity, and producers that account for almost all the rest also announced $60/tonne hikes. If these are successfully implemented, by the end of March suppliers will have recovered $85 of the past year's $115/tonne price drop.

“You've got to take your hat off to this guy. He's determined to show value to his shareholders and gained the upper hand very quickly, while we are going to be fighting for our lives,” remarked one publisher contact, referring to AbitibiBowater CEO David Paterson.

Both buyers and sellers expected that 2008 would bring higher newsprint prices and many contacts believed suppliers would seek a second price hike later in the year.

Three years of increases? “If you are not building 10% price increases into your budget for the next three years you are foolish. Suppliers are pretty cocky right now and there's no sympathy for publishers,” commented a buyer contact with a major U.S. newspaper group.

“I think what is going to drive (AbitibiBowater's) decisions is their income statements and balance sheets, and I think they would tell you they have been too deferential to their customers historically—to their own detriment,” said one contact.

“There's 800,000 tonnes compared to 2007 that will be closed and I'd say the odds are 50-50 or better that we will get north of $700/tonne in 2008, because even with a $150 increase Canadian mills are not going to make money with the dollar at parity,” said a producer contact in Canada.

Consumption will be key. “When you start hearing big numbers thrown out, there is a tendency by some publishers to panic, but my concerns are how many tonnes are really coming out and will consumption continue to fall at the same rate we have seen this past year,” said one big U.S. newsprint buyer. “Seeing a company like Kruger that rarely takes downtime closing 100,000 tonnes will curl your toes, but how much consumption is going to fall is more important from my point of view.”

Publishers in Canada would be hurt less by higher newsprint prices because the stronger Canadian dollar has shrunk their newsprint costs to the lowest level in almost two decades.

“AbitibiBowater has shown what should be done to get the price up to a level where they can make a dollar or two, but at the same time I don't think U.S. publishers can afford to pay the price,” said a contact with a major Canadian publisher. “I am pretty sure they will cut the size (of U.S. newspapers) and at the end of the day demand is going to go down big time—another million tonnes I'm sure.”

Dailies will shrink page size. Supplier sources also said they anticipated consumption cutbacks, but said that given the 6% demand drop in 2006 and near 11% drop in 2007, producers would have difficulty increasing conservation significantly in the first quarter.

“I think it's a given that everybody will go to 44-in. webs as quickly as they can, cut out what they can from editorial, and make the standard U.S. newspaper page 11 inches. That will cut demand 6-8%,” said one supplier contact.

Still, AbitibiBowater has said it is ready to shutter more mills in eastern Canada if they cannot be made competitive.

“Their goal is to align capacity with demand, and whatever that entails in terms of demand decline they are committed to matching that,” noted one U.S. publisher source.

But although suppliers are desperate to push prices higher, some producers are wary of them going too high.

AbitibiBowater's weight and the world. “There has to be an upper limit. At $550/tonne, or even $600 or $625, we don't have any issues with imports. But at $675, $700, or $725 we will see Chinese tonnes here. It's one thing for AbitibiBowater to carry the North American market on its back, but it's another to carry the whole world,” remarked one producer contact in Canada.

• Europe's Holman Paper intends to close 150,000 tonnes/yr. of standard newsprint

capacity at its 795,000 tonnes/yr. Hallsta mill at Hallstavik, Sweden.

• Norway's Norske Skog, the world's second-largest newsprint producer behind AbitibiBowater, may spin off its Asian operations. The company said it has been looking into a separate stock market listing for its South Korean, Chinese, and Thai mills, which run capacity of 1.6 million tonnes/yr. or a quarter of the company's total. Some of Norske's investors want the company to sell its Asian operations to reduce debt, but Norske has ruled out selling the mills outright, saying the price would not reflect their value in a market currently suffering from significant overcapacity, according to a Financial Times report.

Economists Incorporated

An Economic Analysis of the Adequacy of the Snowflake Divestiture in the Settlement of United States of America
v.
Abitibi-Consolidated, Inc. and Bowater, Incorporated

Submitted on Behalf of the NAA

John H. Preston, Kent W. Mikkelsen, PhD, Economists Incorporated, Washington, DC. January 2, 2008.

Table of Contents

Section A. Introduction

Section B. Economic Analysis

1. Unilateral Effects and the Dominant Firm Model

2. Abitibi and Bowater Engaged in Joint Dominant Firm Behavior to Raise NA Newsprint Prices Significantly Above Competitive Levels 2002 to 2006

3. While the Proposed Merger of Abitibi and Bowater Was Under Review by DOJ, Abitibi and Bowater Suspended Their Dominant Firm Behavior and, As a Result, NA Newsprint Prices Declined Significantly

4. AbitibiBowater Resumed the Dominant Firm Behavior in November 2007 Following the October 23, 2007 Settlement Agreement With DOJ to Divest the Snowflake Mill

5. DOJ Required a Much More Significant Divestiture to Settle a Comparable Paper Industry Merger in 2000

Section C. Conclusion

Appendix A—Merger Analysis, Unilateral Effects, and the Dominant Firm Model

Attachments

Attachment A Curricula Vitae of John H. Preston and Kent W. Mikkelsen, Ph.D.

Attachment B White Paper by Economists Incorporated, Submitted on Behalf of the NAA to DOJ on April 11, 2007

Attachment C Supplement 1 to the White Paper by Economists Incorporated, Submitted on Behalf of the NAA to DOJ on July 9, 2007

Attachment D Supplement 2 to the White Paper by Economists Incorporated, Submitted on Behalf of the NAA to DOJ on July 20, 2007

A. Introduction

On January 29, 2007, Abitibi-Consolidated, Inc. (“Abitibi”) and Bowater Incorporated (“Bowater”) announced that they had reached an agreement to merge the two companies.
1

Following an investigation of the merger, the U.S. Department of Justice (“DOJ”) filed a civil antitrust complaint (“Complaint”) with the United States District Court for the District of Columbia (“Court”) on October 23, 2007 seeking to enjoin the merger.
2

Paragraphs 2, 3 and 19 of the Complaint explain why DOJ was challenging the proposed merger.

1
At the time of the merger announcement, newsprint accounted for about 48 percent of the value of the combined sales of the two companies. Other products produced by the two companies include coated papers, uncoated papers, market pulp and wood products. Source: The presentation accompanying the merger announcement, “AbitibiBowater: Creating a Global Leader in Paper and Forest Products,” January 29, 2007, page 10.

2
The Complaint is captioned
United States of America
v.
Abitibi-Consolidated, Inc. and Bowater, Incorporated
.

2. Abitibi and Bowater are the two largest newsprint producers in North America. The combination of these two firms will create a newsprint producer three times larger than the next largest North American newsprint producer. After the merger, the combined firm will have the incentive and ability to withdraw capacity and raise newsprint prices in the North American newsprint market.

3. Unless the proposed transaction is enjoined, Defendants' merger will substantially lessen competition in the production and sale of newsprint, in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18.

19. The proposed transaction would combine Defendants' large share of newsprint capacity, thereby expanding the quantity of newsprint sales over which the merged firm would benefit from a price increase. This would provide the merged firm with an incentive to close capacity sooner than it otherwise would to raise prices and profit from the higher margins on its remaining capacity.

At the same time the Complaint was filed, DOJ also filed a proposed Final Judgment (“PFJ”) which, if approved by the Court, would settle DOJ's case against defendants Abitibi and Bowater. As a condition of the settlement, the defendants are required to sell Abitibi's Snowflake, Arizona newsprint mill (“Snowflake mill”) to an acquirer acceptable to DOJ.
3

Following the filing of the Complaint and PFJ, Abitibi and Bowater completed their merger on October 29, 2007.
4

The newly merged company is named AbitibiBowater.

3
See the PFJ, Section IV.A.

4
AbitibiBowater press release, October 29, 2007.

Prior to the completion of the merger, Abitibi's share of North American (“NA”) newsprint capacity was about 25 percent and Bowater's share was about 16 percent.
5

According to the Complaint, the post-merger share of the combined company would be “over 40 percent.” The NA newsprint capacity share of the Snowflake mill is about 3 percent.
6

Thus, the divestiture of the Snowflake mill would reduce the combined NA newsprint capacity share of the merged firm from about 40 percent to about 37 percent.

5
See the Complaint, paragraph 16.

6
The annual newsprint capacity of the Snowflake mill is 375,000 metric tonnes, according to page 2 of the CIS. However, none of the documents filed by DOJ with the court in this case provides the NA newsprint capacity share of the Snowflake mill nor the amount of total NA newsprint capacity that would be necessary to calculate that share. Based on total NA newsprint production and operating rates for November 2007, current total annual NA newsprint capacity is about 11.7 million metric tonnes, which would give the Snowflake mill a NA newsprint capacity share of about 3 percent. Source: The November 2007 North American Newsprint Flash Report (“Flash Report”), published by the Pulp and Paper Products Council (“PPPC”). The members of the PPPC are NA pulp and paper manufacturers, including most if not all NA newsprint manufacturers.

In its Competitive Impact Statement (“CIS”),
7

DOJ explains why it believes the divestiture of the Snowflake mill will be an adequate remedy to prevent anticompetitive conduct by the merged firm.

7
The CIS was also filed with the Court on October 23, 2007.

The combination enhances Defendants' incentives to exercise market power because the merged firm will control a greater base of capacity over which the merged firm would benefit from an increase in newsprint prices after strategically closing, idling, or converting some of its capacity. Without Snowflake's capacity, the merged firm would not be of sufficient size to be able to recoup the losses from such strategic closures through increases in prices on its remaining newsprint production. The divestiture of Snowflake would adequately address the likelihood that the proposed merger substantially would reduce competition for newsprint in the United States.
8

8
See the CIS, page 6. The CIS does not specifically define the terms “strategically closing, idling, or converting some of its capacity” or “strategic [capacity] closures.” However from the context of the paragraph on page 6 of the CIS quoted above, it is evident that a newsprint manufacturer with a relatively large capacity share will, acting by itself, have the incentive and ability to “strategically” close capacity if the newsprint manufacturer expects to recoup the losses from the capacity closure through increases in prices on the manufacturer's remaining newsprint production. The larger the newsprint manufacturer's capacity share, the more likely the manufacturer will have the incentive and ability to engage in such unilateral strategic behavior. Newsprint manufact

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3AE8-11401. Public record. Not legal advice.