SAN FRANCISCO -- Stocks were restrained today as traders pondered the age-old question: "Who's next?" As in, who might be next to warn about earnings, a la

Merck

(MRK) - Get Report

and

American Express

(AXP) - Get Report

, or worse, the next to go the way of

Enron

(ENE)

.

One candidate is giant paper and building products producer

Georgia-Pacific

(GP)

, over its possible exposure to asbestos litigation, not to mention its onerous debt load. G-P's shares have been whipsawed of late, falling more than 18% from Thursday through Monday, amid revelations of multimillion-dollar rulings in asbestos claims against

Halliburton

(HAL) - Get Report

.

After simmering for years, the asbestos issue has returned to Wall Street's front burner. Last week, a Baltimore jury awarded $30 million in damages against Halliburton's Dresser Industries unit, prompting a drop in Halliburton's shares of more than 40% on Friday. In late October, a Mississippi jury ordered Halliburton,

3M

(MMM) - Get Report

and AC&S of Pennsylvania to pay a total of $150 million to six laborers allegedly exposed to asbestos as far back as the 1950s.

Georgia-Pacific, whose asbestos exposure stems from its 1965 acquisition of Bestwall Gypsum, faced claims from 62,000 such plaintiffs as of Sept. 30, according to a

statement released Monday.

"G-P is the next company to go the way of Halliburton" due to asbestos claims, warned one hedge fund manager whose firm is short the stock. The source requested anonymity, which understandably rankles some readers. But this column has a longstanding relationship with the hedge fund manager, whose $500 million-plus fund is up more than 20% year to date.

The recent rulings against Halliburton and others will draw claimants to Georgia-Pacific "like bees to honey," the source forecast, comparing asbestos lawyers to "locusts

which focus on the easy, big-pocketed companies until they are dry husks."

The knock on lawyers aside, Chris Wood, partner at C.W. Wood & Associates, a San Francisco-based law firm that specializes in asbestos defense, agreed with the spirit of that comment.

"Plaintiff attorneys have relied on huge settlements from

asbestos producers and nitpicked elsewhere," Wood said. "Now, because those companies are not there

due to bankruptcy filings, they're trying to get the same settlements out of a new group of defendants."

Nine major corporations, including

W.R. Grace

(WRA)

and

Owens Corning

(OWC)

, have filed for bankruptcy protection since January 2000 because of asbestos-related claims,

USA Today

recently reported.

In Monday's statement, Georgia-Pacific sought to reassure investors by declaring "no recent event ... has affected its present or foreseeable future liabilities" to asbestos claims, and that it has sufficient insurance to handle such claims.

A G-P spokesman declined to comment further on the asbestos issue, citing the statement.

But the short-seller wasn't mollified, noting G-P disclosed it has faced about 40,000 new claims per year for the past three years, and that both the number of claims and the average cost of resolving them has increased.

Furthermore, he said asbestos isn't the only worrisome issue for G-P, which reported a loss from continuing operations of $1.27 per share for the first three quarters of 2001. The company is expected to lose 4 cents per share this quarter before returning to profitability next year, according to analysts' estimate.

Asbestos, and Beyond

"Here's the problem: They've got a ... load of debt, and have to do forced asset sales" in a difficult economic environment, the short-seller said.

Georgia-Pacific has been divesting certain assets since 1997, when it spun off

The Timber Company

(TGP) - Get Report

. The firm's attempt to reduce debt, which totaled $13.1 billion at the end of the third quarter, has included the sale of paper mills to

Domtar

(DTC)

, and the closure of both pulp and gypsum production capacity.

Furthering that effort partially explains why Georgia-Pacific shares rose 4.7% Tuesday following an

announcement that

Willamette Industries

(WLL) - Get Report

may acquire G-P's building products business. Today, G-P's stock slid 2.4% to $28.75, about $1 above its 52-week low.

Much of the focus has been on Willamette's effortsto fight off a takeover bid by

Weyerhaeuser

(WY) - Get Report

. But from G-P's perspective, a presumptive deal fits into its long-running strategy of reducing its debt -- it has paid off $3.5 billion this year -- by transforming into a consumer-focused, brand-oriented company "with higher returns than traditional forest products companies," according to the firm's spokesman.

A key to that strategy was last year's acquisition of Fort James Paper, from which G-P netted consumer brands such as Quilted Northern, Brawny, Mardi Gras, and Dixie.

The deal has generated annualized savings of around $236 million this year, the spokesman said, with expectations for the total to rise to $500 million in the coming years.

Consumer products, which generated 52% of G-P's earnings before interest and taxes for the first nine months of 2001, "is key to the strategy to make earnings more predictable and reliable," he said.

Through the third quarter, G-P's consumer products division produced sales of $5.5 billion and EBITDA of $1.1 billion, up 2.3% and 14.1%, respectively, from the first nine months of 2000.

The EBITDA improvement is significant because G-P was recently in danger of triggering defaults on some bank covenants because its debt-to-EBIDTA ratio was too high. The firm has renegotiated those agreements to avoid default, G-P's spokesman confirmed, although he declined to provide details.

The renegotiation of bank covenants and the potential for more debt reduction via the sale of the building products division are both short-term positives for G-P.

But in addition to the debt and asbestos challenges, the short-seller noted prices for pulp and containerboard have plummeted in recent years, while the commercial side of G-P's tissue business has slumped since Sept. 11.

From 1998-2000, the "away from home" business -- which mainly serves hotels, airlines and fast-food restaurants -- contributed an average of 26% of that segment's earnings.

The commercial paper business "slackened" after Sept. 11, G-P's spokesman conceded. But that drop was "more than offset" by an increase in its retail and fast-food businesses, as well as the drop in energy costs.

Nevertheless, "with the asbestos problems, the only thing

G-P has going for it is market cap," the short-seller argued.

Among others, he is betting that even that may be imperiled.