Sunday, January 26, 2014

Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts

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.

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17 comments:

Anonymous said...

If selling mills allows the merger to move forward one can surmise that Rumford, Bucksport and possibly Luke will be prime candidates. The big question is: who would want them? Bucksport ,although old, is a very nice, clean little mill. Unfortunately it is configured to make a low value product.

Anonymous said...

Why is Rumford always mentioned as a mill to close? It's my understanding Rumford has an excellent puplmill and co generation facility...

Anonymous said...

Rumford is mentioned due to the cost per ton of making paper.

Anonymous said...

The Rumford mill is actually quite impressive....very low fuel cost per ton, the lowest if all New Page mills, and now making pulp on 2 of it's machines

Anonymous said...

I am surprised that nobody has mentioned Biron.Its an old mill that could see a possible shutter.Bucksport has been rolling its downtime as of late...no pulp mill and low cost cost product is to blame. Sc is also eating into machine orders. Rumford has one viable machine left...which from what i understand experienced some major damage as of late and will need major capital to return to form. My guess for closings are Bucksport ,rumford ,biron

Anonymous said...

My guess is Biron, Luke, Bucksport, with Wickliffe on the bubble....Rumford will be safe.

Anonymous said...

Rumford has 2 excellent paper machines and a third that's a pulp dryer, which makes glued bales.....no long lasting damage to the one machine that was down.....environmental laws going into affect next year are gonna severely impact certain mills VERY negatively. Again Rumford flies below the radar!

Anonymous said...

This is sad we are placing bets on the poor families that may be heading for financial ruin.The writing is on the wall for the mills that are to be affected.Now its the employees of the marginal mills...you know who you are...to secure their future now! Don't wait for them to inform you what your gut has been telling you all along.

Anonymous said...

HINT: Rumford and Bucksport are the two most picked on mills between the verso and Newpage. Make the hard choices sooner than later.

Anonymous said...

The fat lady is warming up . . . Verso can't get their bondholders to volunteer for the 50% haircut . . . it's only a matter of time, and maybe a few more extensions before they give up . . . but don't fear, now that the world knows that the NewPage first liens will settle for only $250 million in cash, someone else will come along with the cash and some stock that isn't worthless and NewPage will still be sold . . .

Anonymous said...

The Feds will see fit to deal the American Paper Industry another kick in the proverbial shins. Obviously theyd like to see us be another third world nation soley depending on everyone else...But you can bet your biffy we'll still be sending the Asian market good wood supplies long after the American mills have pulled the squirt (former papermaking lingo).... Not to mention the coal we cant burn but the rest of the world can...Dont we ALL breathe the air ????.....And lastly...Corporate Greed....Need I say more !!!!

D. Eadward Tree said...

To Anonymous (9 p.m. Feb. 19, 2014): As for the feds kicking the U.S. paper industry in the shins, it could be worse. With what they're doing to the Postal Service, the kick they're giving to mailers seems to be aimed a bit higher on the anatomy.

Anonymous said...

Verso doesn't have the money to buy Newpage and now they want to change the terms of the deal.....only winners here are the Verso stock holders who saw their stock value increase.

Jonah Semyonov said...

I think the mill in Jay should be sold to KPS capital partners owned Expera Specialty Solutions of Kaukauna WI. They already have production rights on the mill's Pm No. 5. The mill also has another specialty paper machine. Some jobs may be lost, but at least the mill will stay.

Anonymous said...

Now it gets interesting . . .

Verso Paper Corp. Announces Termination of Exchange Offers and Consent Solicitations

http://investor.versopaper.com/releasedetail.cfm?ReleaseID=829318

Ed said...

What do you think the next steps are here? Will Newpage kill the deal? Will VRS have to pay the 27mm break fee?

Anonymous said...

A) This acquisition will proceed, B) There will be a divestiture of at least one mill. C) Rumford is definately on "sale".....here is why. Current DOJ analysis shows appx. 50% combined freesheet capacity and nearly 60% coated groundwood market share. Coated Groundwood is the bigger concern. So, if one had to divest coated groundwood, who is at risk. 1) Escanaba, 2) Biron, 3) Rumford, 4) Jay, 5) Bucksport....no particular order there. Escanaba would be a logical choice, but a deal breaker; Biron wouldn't make sense given it's higher cost structure and in-ability to "stand-alone"...tied too tightly to Rapids; Bucksport probably couldn't be sold as in no one would want it.....sorry; Jay is suckled too tightly to Verso's tit, otherwise I would say Jay is a better candidate; lastly Rumford would be the likely choice. Marginal paper assets, but excellent quality, ok cost structure, excellent backend, and good grade diversity (Coated GWD, CFS, Specialty, and Market Pulp). Sell Rumford and it would cure the merger imbalance. Look for perspective buyers to be either SAPPI, Resolute, UPM, or even a small player like Twin Rivers. Look for a fire sale.