It will be less work to simply replace that dry wall--
If you wish to repair it----prime well with Guards--
remove and loose paper and skim coat with Multi Purpose drywall compound---It contains glue and will bond best to the rough paper---
if the paper continues to bubble up from the wet compound--stop--cut out the bubbled paper---soak with more guards--and go at it again.
Thin coats----I suggest you use light weight compound for the top coat---it's easier to sand than multi-purpose