Did Verso Come To Purchase NewPage Or To Bury It?

Talk about the pot calling the kettle black: NewPage told a bankruptcy court this week it is reluctant to merge with Verso Paper because of its rival’s high risk of going bankrupt.

But it also revealed an even bigger reason to rebuff Verso’s advances: Rather than engaging in a good-faith effort to forge a union between North America’s two largest makers of magazine-quality paper, NewPage said, Verso’s owners are engaging in “tactics of holdup and delay” to weaken NewPage and hinder its emergence from bankruptcy protection.

NewPage’s bankruptcy case presents Verso “with both significant opportunities and risks,” an attorney representing holders of first-lien debt wrote to the bankruptcy court today.

“On the one hand, Verso’s market position will be greatly improved if Verso is able to acquire NewPage’s assets at fire-sale prices, or if the Debtors fail to successfully reorganize [NewPage],” Dennis F. Dunne wrote.

“On the other hand, Verso is significantly threatened by the possibility
that NewPage will successfully reorganize under a stand alone plan and emerge from bankruptcy a stronger, healthier company with a deleveraged balance sheet.” [Editor’s note: In the declining, capital-intensive publication-papers industry, that’s known as the “He Who Gets To Bankruptcy First Wins” strategy. See for example Resolute Forest Products AKA Abitibi-Bowater.]

As NewPage veered toward insolvency last year, Verso’s primary owner, hedge fund Apollo Management, snapped up many of NewPage’s nearly worthless second-lien bonds.

NewPage is so heavily indebted that holders of those bonds will apparently end up with little compensation, if any at all, once the claims of first-lien debt are satisfied. But Apollo has found other value in the bonds, using them as leverage to gain a place at the table in bankruptcy-court discussions of NewPage’s future and to put forward various schemes to combine the two companies.

NewPage is eager to exit Chapter 11 and hopes to file a plan of reorganization within 30 days, but says a proposed merger with Verso would undergo an antitrust review of at least six months.

Both companies have bolstered their arguments to the court this week with the comments of stock analysts. Verso on Tuesday cited a recent J.P. Morgan report that called a Verso proposal “surprisingly reasonable” and “the best outcome for . . . NewPage bondholders.”

NewPage countered yesterday with a report from industry analyst Chip Dillon saying that if Verso’s CEO “is able to turn Verso’s fortunes around without a major financial restructuring, he will have pulled off the single hardest turnaround in the history of the paper industry.”

It also cited analyst Adam Gefvert: “NewPage is getting crushed with debt, and the first lien creditors are better off going through bankruptcy than merging with Verso. These creditors are just trying to dig themselves out of an unfortunate financial hole. They don’t want to dig themselves a deeper one by merging with Verso.”

Gefvert has shorted Verso stock because “long term investors have a better chance investing in a different kind of paper – lottery tickets.”

Also this week, Leon Black, Apollo’s lead partner, was revealed as the art collector who paid $120 million in May for Edvard Munch’s “The Scream”. Many people find the work haunting, even depressing, but compared with watching his investment in the paper business the past few years, the famous painting probably looks downright cheery to Black.

Moral of the story: The best way to make a small fortune in the paper business is to start with a large fortune.

Related articles:

• NewPage's Fraudulent Deals Started in 2007, Creditors Claim  
• A Major Print-Media Bankruptcy Is Likely in 2012, Voters Say  
• NewPage-Verso Merger Unlikely, 2 Experts Say 
• Leon Black’s Bid Entices NewPage Bondholders: Great Bloomberg piece on investors' excitement about the proposed marriage. Rarely will you see this much detail and insight about the paper industry in the mainstream media.