The U.S. Department of Justice is likely to delay or even block the proposed merger of NewPage and Verso Paper, according to a news service that focuses on bankruptcy issues.
“Because the deal may increase the likelihood of both post-merger unilateral effects and coordinated capacity reduction and price increases, DOJ is almost certain to issue a second request” for information, The Capitol Forum wrote in a Jan. 24 analysis. “At a minimum, this will delay closing for several months, and could lead to a DOJ move to block the deal outright.”
What will catch DOJ’s eye is that the merged company would control 58% of North American capacity to make coated paper, said the report, which is only available to The Capitol Forum’s subscribers but was shown to Dead Tree Edition.
The report predicted that Justice will examine whether, in the words of its Merger Guidelines, the combined company would “find it profitable unilaterally to suppress output and elevate the market price” of coated paper.
It cited as precedent Justice’s complaint in the 2007 merger of Abitibi and Bowater, which at the time owned 41% of North America’s newsprint capacity. The merger was allowed to go forward only after Abitibi sold a low-cost mill.
The department said that neither Abitibi nor Bowater “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 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.” Industry observers have made similar comments about the proposed Verso-NewPage combination.
A significant difference in the Verso-NewPage case is that offshore imports could limit the merged company’s pricing moves. Only 2% of newsprint in North America came from offshore when AbitibiBowater was formed, versus about 16% for coated paper in recent years.
Verso and NewPage may argue that supercalendered paper is part of the same market as coated paper, which would shrink the companies' market share somewhat because Verso no longer makes SC paper.
A significant factor arguing against a Verso-NewPage merger, according to the report, is that the coated-paper industry is prone to cooperation among competitors because it is highly concentrated, has high barriers to entry, and tends to have relatively transparent pricing. Justice certainly is aware of that because it brought charges in 2007 against European giants UPM and StoraEnso for discussing how to stabilize U.S. coated paper prices.