THE NATION’S BUSINESS

Rebounding from $2 billion in debt

Of accountants’ ‘generally accepted principles, ’ Petty says: They’re not generally accepted, and they’re not principles’

Peter C. Newman July 18 1994
THE NATION’S BUSINESS

Rebounding from $2 billion in debt

Of accountants’ ‘generally accepted principles, ’ Petty says: They’re not generally accepted, and they’re not principles’

Peter C. Newman July 18 1994

Rebounding from $2 billion in debt

THE NATION’S BUSINESS

Of accountants’ ‘generally accepted principles, ’ Petty says: They’re not generally accepted, and they’re not principles’

PETER C. NEWMAN

The forest products industry— Canada’s largest employer—is run mostly by faceless bureaucrats who cut trees, pollute rivers and mint money. They occasionally do all three, of course, but the stereotype quickly breaks down, especially when it comes to George Petty, the combative founder, chairman and resident cheerleader of Repap (paper spelled backwards) Enterprises Inc., the $3.4-billion Montreal-based paper maker.

Now ranked as this continent’s fourthlargest—and the world’s 10th-largest—producer of coated paper (stock like this magazine is printed on, though Maclean’s is not one of Petty’s customers), Repap employs nearly 5,000 people in mills in British Columbia, Manitoba, New Brunswick and Wisconsin. What makes the company unique is that Petty, 60, created the enterprise virtually by himself. The son of a Montreal railway clerk, he worked his way through McGill University, became a college hockey star and was No. 1 on the Canadiens’ protected list, though the option was never exercised. After selling pulp for International Paper Company, he bought a run-down pulp mill in Témiscaming, Que., on credit, and turned it around. Using it as collateral, he eventually borrowed enough to acquire five other about-to-be-scrapped mills that, after modernization, now form his empire. In the process, he pioneered leveraged buy-outs in Canada long before anyone knew the term, and at the same time managed to squeeze almost $100 million in subsidies and loan guarantees out of various government agencies. His financing deals grew so complicated that the banks (mostly the Royal and the Toronto-Dominion, which together at one point held $600 million of his loans) could never figure out when to pull the plug.

His brushes with bankruptcy became legendary, though he never went over the edge. As his balance sheets became more imbalanced, Petty frequently attacked his

own accountants for following what they claimed to be generally accepted accounting principles. “They’re not generally accepted, and they’re not principles,” he thundered. He kept the firm going mainly by juggling one creditor against the other. He took the company public in 1986 (“to put myself up there on the national scoreboard and see how we’re doing compared to the rest of the industry”) and went on a spending spree to modernize his mills. Just as the current recession was beginning to bite, Repap found itself $2 billion in debt. Subsequent interest payments grew so high that at one point, in the summer of 1993, the company hadn’t enjoyed a positive cash flow for 25 months and had twice fallen out of compliance with some of its debt agreements. Petty responded by raising $130 million through the private sale of convertible debentures, and then floated a further $400 million by selling junk bonds.

That cash injection was key to Petty’s survival, but it cost him control of the company. Before these transactions, he controlled 70 per cent of the company (mainly through multiple-voting shares) and now he is down to a straight 24 per cent. “I’m still the largest

shareholder, and I haven’t really lost control until somebody else with more equity comes along,” he says. “Anyway, I’d rather own a quarter of something that’s really good instead of three-quarters of something that wouldn’t have survived. I can be accused of a lot of things, but having a good sense of timing isn’t one of them. We brought those new paper machines on-stream just in time for the long-winded recession.”

In 1993, Repap still suffered a hefty operating loss, and in this year’s first quarter another $34.5 million went down the tubes from revenues of $360 million. But the market agrees that the company has turned the corner; its share prices are up to $4.25 from last year’s low of $1.80. Friends attribute Petty’s survival to higher forces. In his private life, Petty is an avid disciple of televangelist Rev. Robert H. Schuller. (That’s the guy in the purple jumpsuit who preaches from his ostentatious $18-million Crystal Cathedral in Garden Grove, Calif.) Petty has contributed considerable money to Schuller’s ministry and invited him to bless one of Repap’s new paper machines.

Petty’s greatest excitement at the moment is exploiting the benefits of the emerging alcell process, which yields sulphur-free pulp and several byproducts such as material for plastic mouldings, agricultural feeds, and the stuff that goes into brake and clutch linings. Petty believes commercialization of the process, in which Repap has already invested $180 million, will eventually be recognized as his greatest contribution to the industry.

Meanwhile, Petty crosses the country, speaking out on any issues that strike him as significant, gesturing with his six-foot, twoinch frame to make his points. “The links between monetary policy and society’s needs have broken down,” he claims to anyone who will listen. “Chronic unemployment is disrupting the fabric of Canada and has caused a rise in protectionist sentiment that could compromise our economic goals.” He blames John Crow, the former Bank of Canada governor, for having propped up our dollar too long, thus “breaking the back of entrepreneurial Canada.”

Although none of his paper mills are in Quebec, Petty lives and works in Montreal (when he’s not at his Palm Beach, Fla., mansion) and firmly believes that Quebecers “will have the good sense not to separate, partly because they’ll realize that there’s lots of capital—now staying away—ready and willing to come into the province and do many positive things if it stays in Canada.”

It’s typical of the man who, instead of bemoaning the battle he has had with Repap’s debt burden over the past half decade, sees his situation as being Felix-the-Cat perfect. “We have the best equipment in the business and have invested heavily in market penetration,” he says, “so that what the accountants called losses, I call investments. We’ve got all our capital spending behind us, while our competitors still have it ahead of them.” So there.