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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Tuesday, January 21, 2014

Odd Verso-NewPage Structure Eyed Warily by Wall Street

The proposed merger of NewPage and Verso Paper would create a sort of two-headed beast – a prospect that seems to have Wall Street both baffled and concerned.

The complex deal between North America’s two largest makers of coated paper would see both NewPage and Verso survive as separate companies under the same management. Technically speaking, NewPage would merge with a Verso subsidiary and become “a non-guarantor restricted subsidiary of Verso (with a standalone capital structure),” according to a recent NewPage presentation.
In other words, it appears that NewPage would only be on the hook for debts related to the current NewPage assets rather than those of the combined company. That arrangement was presumably made to satisfy NewPage’s bondholders, who would be understandably reluctant to take on Verso’s much riskier debt.

NewPage would pay Verso to take over such functions as purchasing, customer service, logistics, marketing, finance, legal, technology, operations, and manufacturing services. It’s not clear whether there is much of anything that NewPage would not outsource to Verso.

Moody’s Investor Services reacted to the deal by downgrading Verso’s “probability of default rating”; it has NewPage’s rating “under review for possible downgrade.”

“It is anticipated that following the acquisition, NewPage and Verso will be operated as separate legal entities with a shared services agreement,” wrote Moody’s, which is taking a close look at the proposed capital structure as well as “the integration process and the ability to move funds within the combined company.”

“If the merger closes and Verso is able to successfully integrate the operations of NewPage, improve its ability to cope with the declining coated paper industry through improved management of operating capacity and obtain significant synergies,” Verso might be upgraded, Moody’s wrote. But if the deal isn’t closed or Verso has trouble integrating NewPage, Verso could be downgraded, Moody’s said.

Verso’s stock price spiked more than eight-fold two weeks ago when the merger was announced but since then has drifted downward to about half of its peak price.

NewPage said the combined company would be the fourth largest maker of coated paper in the world, barely behind Asia Pulp & Paper, UPM, and Sappi. But it would be the dominant beast in North America, with three times more North American capacity than any competitor and more than half of the continent's market share.

NewPage and Verso operate “many of the lowest cost mills” for both coated freesheet and coated groundwood, and the merger would bring additional cost reductions, it added. The two companies already have seven of North America's eight lowest-cost coated freesheet mills, NewPage claimed.

See also Untangling the Verso-NewPage Deal

Sunday, January 19, 2014

Forever Stamp-ede: Consumers May Hoard Stamps This Week But Stop Buying Next Year

For the next week, Forever Stamps will be the hottest deal going, but a year or two from now the popular stamps could actually decrease in value.

The price of a First Class stamp will rise from 46 cents to 49 cents next Sunday, January 26. Someone who buys a Forever Stamp this week, for 46 cents, and uses it a month later in place of a normal First Class stamp will save 3 cents and have an annualized return on investment of 113%.

No wonder some are expecting a stamp-ede of buyers stocking up on Forever Stamps this week. (Do you suppose post offices will have additional people working the counters?)

But holding onto the stamps for more than a year or so may not pay off so well. Because of a new twist in the upcoming price increase, the price of a First Class stamp may actually decrease in 2015 or early 2016.

Next Sunday’s price increase for First Class letters has two parts. One cent of the increase is the usual, annual inflation-based postage hike. The other two cents are from a temporary “exigent” price increase that is slated to expire within two years. (An influential Senator has proposed making the exigent increase permanent, as the U.S. Postal Service had requested.)

If inflation continues increasing at about 2% annually, the cost of a First Class letter would probably rise to 50 cents in January 2015. But when the exigent increase expires, most likely in late 2015, the price would drop to 48 cents. If inflation remains at about 2%, the price probably wouldn’t hit 50 cents again until January 2017. If inflation is even lower, it might take even longer for a 49-cent Forever Stamp to reach parity.

This week’s stamp-ede should provide a nice cash infusion for the unprofitable USPS, which has come perilously close to running short of cash at times. By the same token, consumers are likely to hold off on buying Forever Stamps in 2015 as the exigent increase nears expiration.

The Postal Service will have difficulty figuring out how such fluctuations in the demand for Forever Stamps will affect its long-term finances. It can only guess at how many Forever Stamps have been purchased but not used. In fact, USPS realized last year that its guess was too high, resulting in a $1.3 billion favorable accounting adjustment.

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Monday, January 13, 2014

Untangling the Verso-NewPage Deal

Somewhere there must be a person who fully understands all aspects of the proposed combination of NewPage and Verso Paper, North America’s two largest makers of magazine-quality paper. But mostly there is confusion and debate and even misinformation about the marriage and what it would mean for the paper industry and its employees, for magazine publishers, and for catalogers.

Such a pre-nup! What Verso and NewPage have worked out is far more complex than described in the companies’ announcements or even in stock analysts’ reports. Included are some odd provisions that have gone mostly unnoticed.

Here is Dead Tree Edition’s attempt to explain the structure and implications of the impending union, which was announced a week ago after a stormy, three-year courtship:

Why is the proposed deal important?: The two companies control roughly half of the North American market for glossy papers (coated freesheet, coated groundwood, and high-quality supercalendered papers). In theory, a company with that much market share has the power to drive up prices, or at least to keep them stable by preventing gluts in the market. NewVerso (my name for the new company) could also throw its weight around among suppliers and merchants, creating both winners and losers.

Will the marriage be consummated? There seem to be two main hurdles:

1) Anti-trust approval: The Justice Department, goaded perhaps by major paper buyers, may block the deal on grounds that NewVerso’s huge market share would be monopolistic. A more likely scenario is that the company would be forced to sell (or close) a mill, as Abitibi and Bowater were required to do when the two newsprint giants merged.

2) Verso noteholders: For the deal to be consummated, holders of $538 million in Verso debt must agree to exchange their notes for ones worth only $267 million. “This implies debt forgiveness of $271.1 million,” wrote Paulo Santos for Seeking Alpha. “Debt forgiveness is usually attained through a pre-packaged bankruptcy or regular bankruptcy.” Bondholders may chafe at taking such a huge haircut without the stockholders taking a hit. But many had paid less than 50 cents on the dollar for Verso’s distressed debt, and they may decide the NewVerso deal is better than the most likely alternative, a Verso bankruptcy.

Who will the winners be if the deal goes through? Lawyers and investment bankers, of course. Perhaps Verso stockholders, who have seen the price spike six-fold in just a week. And probably competitors like Resolute, UPM, and SAPPI, who would benefit from NewVerso using market discipline to keep prices high.

And the losers? Customers. Either Memphis (Verso’s home) or Dayton (NewPage’s headquarters), at least one of which will lose a corporate headquarters. Probably some supplier and paper merchants. The big losers would be employees and towns of the mill or mills that will be closed.

But didn’t Verso promise it wouldn’t close any mills? No, it said it had no plans to close any mills. Translation: “Nothing in the legal documents requires us to close any specific mills.” Analysts seem to be unanimous in their view that the merger would lead to capacity reductions.

In fact, one of the deal documents even provides incentives for NewPage or Verso to reduce their production capacity by more than 10%. (See the discussion of “triggering events” in the Services Agreement Term Sheet. I’m not aware of any analyst or journalist who has addressed the meaning or significance of the Shared Services Agreement, but I find it intriguing – and confusing.)

That doesn’t sound like a straightforward purchase of NewPage by Verso. What gives? Technically speaking, a Verso subsidiary will merge with a NewPage entity. But each company has several subsidiaries that are involved in related transactions with the others’ subsidiaries, making the NewPage takeover anything but straightforward.

For example, the Shared Services Agreement indicates that Verso will be supplying administrative and marketing services either to NewPage before the takeover occurs or to a separate NewPage entity that will continue to exist after the takeover occurs. (Update: As explained in Odd Verso-NewPage Structure Eyed Warily by Wall Street, NewPage would continue as a separate operating company after the merger.) That agreement addresses how certain costs of the merger, such as severance payments, will be allocated between NewPage and Verso. It also calls for Verso to invoice NewPage each quarter for “realized synergies” resulting from the services that Verso provides to NewPage.

How did nearly bankrupt Verso, whose stock-market value was barely $30 million a week ago, pull off a deal that’s been valued at $1.4 billion? Short answer: OPM (Other People’s Money). Longer answer: Good question.

The Verso-NewPage deal is “sort of like two very weak companies holding each other up,” Vertical Research Partners analyst Chip Dillon told Reuters. “Essentially the deal is all debt, there is no real equity involved here.”

The $1.4 billion figure is based on NewVerso giving NewPage stockholders $250 million in cash and $650 in NewVerso first-lien notes, plus taking on $500 million in existing NewPage debt. NewPage stockholders would also end up with 20% to 25% ownership of the merged company.

But how did a financially troubled company like Verso find backers for such a deal? The deal would create value in two ways: 1) Debt reduction: The proposed debt exchange with Verso noteholders would eliminate $271 million of the company’s debt. 2) Synergies: Verso says the deal will yield at least $175 million in pre-tax cost savings during the first 18 months. Besides economies of scale in administration, marketing, and purchasing, having more machines means each can operate more efficiently by making a narrower range of products.

How did Verso go from being worth $35 million to $200 million in barely a day? That’s the subject of some debate in the markets. Until last week, a Verso shares was basically a cheap (as in 65 cents) lottery ticket, apparently destined to be worthless but potentially valuable if the company could avoid bankruptcy. When news of the NewPage deal broke, some traders figured Verso now had a future and jumped in with both feet. There are somewhat disputed reports that Verso short sellers were scrambling to cover their shorts, driving share prices up even further. And the proposed debt forgiveness was viewed by some as “free money” that added to Verso’s stock value.

Whatever the reason, share volume jumped more than 14,000% on Jan. 6 and nearly doubled again the next day.

Is Verso stock a good investment? It's still more like a lotto ticket than an investment. If the deal doesn’t go through, bankruptcy seems likely. And even if the marriage is consummated, NewVerso could end up like the old Verso – too saddled with debt to have much value when demand for its products is in long-term decline. Then again, if NewVerso emerges as even a moderately healthy company, the Verso stock could see huge gains.

Would NewVerso be a successful company? The precedents are mixed. The widely cited model is the North American uncoated freesheet market, where consolidation has yielded two giants that can keep prices stable in the face of declining demand by judiciously reducing their output. But there’s also the case of Abitibi and Bowater, the two largest makers of newsprint in North America when they combined in 2007. High debt and rapidly declining demand pushed them into bankruptcy reorganization only 18 months later.

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Monday, January 6, 2014

8 Media Trends You May Have Missed in 2013

The mainstream press has had its fill of articles recapping 2013, but it missed some important trends and lessons that emerged during the year:

Newspaper reaches for a new high
1) New hope for newspapers: The Denver Post has hit upon a promising market for beaten-down daily newspapers: weed. When publishers from other states see how the Post is trying to cash in on legal pot with its new web site The Cannabist, they may be tempted to start publishing a lot of pro-legalization editorials. I suggest a companion print product -- a special section printed on hemp, with an invitation to “Read it, then smoke it.”

2) Why cell phones have a “vibrate” option: A major magazine company revealed the startling results of an in-depth investigation via a news release: “Meredith's Parents Network, the leading parenthood media portfolio which includes Parents, American Baby, FamilyFun and Ser Padres, today announced exclusive new findings that phones and tablets have improved moms' sex lives and texting has replaced talking in their romantic relationships.”

3) The Postal Service is still solvent: For several years now, a lot of us have been saying that the U.S. Postal Service was months away from running out of cash unless Congress did something. Congress, of course, did nothing during 2013 – unless you count the naming of post offices. Still, with downsizing, increased volumes of parcels and “junk mail,” and its refusal to “prepay” retiree health benefits, the Postal Service keeps delivering six days a week and still has a few pennies in its piggybank -- even though it’s billions of dollars in the red. Now if it could just be allowed to deliver legalized marijuana . . .

4) Magazines are not newspapers: For several years, pundits have predicted that traditional magazine publishers would soon go the way of newspapers, shriveling up from massive losses of advertising, circulation, and profitability. But 2013 proved them wrong. Magazines – or, rather, “magazine media” – are adapting better to the web and are finding growth in such fields as events and services. Some had banner years for their print products, with increased ad pages and even some expanded ratebases. Meanwhile, one of the nation’s most storied newspapers was so diminished in value that Amazon founder Jeff Bezos was able to buy it with some spare change he had lying around.

5) Print is hot: It wasn’t just that web-only brands like Newsweek, AllRecipes, and Politico decided in 2013 to publish printed magazines. Print is now so "in" that a TV ad for Viagra featured the owner or manager of a printing company.

By the way, Viagra in a Printing Plant? What’s Up with That? had a larger audience and stirred up far more discussions than any previous Dead Tree Edition article about printing. Which tells you something about what printers and us print geeks have on our minds.

6) The digital divide is a myth: We’ve been told for several years that, once people got e-readers or tablets, they would mostly abandon printed publications. Several studies released in 2013 told us otherwise: Tablet owners overwhelmingly prefer printed magazines to digital ones; only 22% read tablet-based magazines on a weekly basis.  iPad owners read more printed books than does the average consumer. And most magazine publishers will tell you they have far more tablet owners reading their print editions than their apps.

7) A business model for iPad magazines emerges: Many publishers had viewed the iPad as a great medium for their publications and apps. But Apple has recently thumbed its nose at traditional magazines, allowing its Newsstand app to fall into disrepair and making it nearly impossible to find all but a few e-magazines.
A magazine that is getting promotional love from Apple's Newsstand

Recent quotations helped me understand, however, that there are at least two paths to publishing success on the iPad: The first is ad agencies: “The target market for iPad magazines is 22-year-old media buyers," a publishing colleague told me. "Selling iPad subscriptions to anyone but your print subscribers has become well-nigh impossible. But having an iPad version really helps you with the ad agencies, regardless how meager its circulation is."

And the other path? Porn: “It is apparently easier to get porn magazines from Russia into the App Store today than it is a bug fix update for a major consumer title,” D.B. Hebbard wrote last month for Talking New Media.

8) The wheels are coming loose on the content marketing bandwagon: 2013 was the year we publishers realized that every Fortune 500 company, and a lot of smaller ones as well, seemed to be copying our every move under the moniker of content marketing. Chanting mantras about “owned media” and “brand journalism,” practitioners sound like devotees of some Koolaid-drinking cult as they espouse the virtues of bypassing publishers to go direct to the consumer.

But the honest content marketers are starting to acknowledge the bandwagon is hitting some bumps. Having the junior member of your PR department do the writing is a cheap way to create articles no one wants to read; there’s a reason that kid couldn’t get a job as a real journalist. Even for good articles, finding an audience is challenging regardless of how many tweets, posts, and pins a brand uses to publicize it. Consumers, it turns out, aren't especially interested in connecting with brands.

Lately, more brands are turning to professional journalism – either by using qualified freelancers or by licensing content from publishing companies – to boost the quality and credibility of their content. And some are also turning to those bypassed publishers for help in promoting their content. It’s a hot new concept known as “advertising.”

Saturday, January 4, 2014

Flexible Workforce Lowers USPS Wages -- and Hurts Productivity

The U.S. Postal Service’s shift to a more flexible workforce has reduced average hourly pay, but adding so many new employees has also hindered productivity gains.

At last report, the “straight-time” pay of postal employees was averaging $25.63 per hour in FY2013, down 1.4% from $25.98 a year earlier. Despite a big jump in overtime hours, even the average total hourly pay had dropped slightly during the year.

Most employees had small wage increases, but the hourly averages were dragged down by temps and other non-career employees who replaced retiring workers. USPS’s career workforce decreased by 37,000 during FY2013, while 26,000 non-career employees were added, the agency said in its recently released annual report to Congress.

More than one in five postal workers is now a non-career employee, versus less than one in six only a year earlier.

“We hired and trained many new non-career employees and this cost many workhours,” the annual report said. “The learning curve for these workers caused us to use more hours as they gained experience (although at a lower wage).”

USPS hoped to boost deliveries per work hour from 41.0 to 42.7 during FY2013, but the annual report said it fell short partly because so many new employees had to be brought up to speed. Having more mail volume than anticipated (a decline of less than 1%, versus 5% the previous year) also hurt productivity, despite improving USPS’s finances, the report noted. The report does not discuss another productivity measure -- mail pieces delivered per work hour -- but that appears to have changed little during the year.

Downsizing of the workforce, consolidation of facilities and carrier routes, and greater automation are helping USPS work more productively. But the growing volume of labor-intensive parcels, though profitable, tends to mean slower deliveries, as does the increasing number of delivery points.

Employees also claim that staff reductions sometimes backfire because they can leave postal facilities with the wrong mix of positions and experience. Letter carriers have been especially vociferous about changes that have inadvertently hurt their productivity, such as having to work longer days and to make more deliveries in the dark. At last report, overtime among the city-carrier force was on track to increase more than 11% over FY 2012.

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