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