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


BoSacks said...

In 2007 I forecasted a 50% reduction in the publication paper market by 2020. I think that that is still a reasonable number, all things considered. By the time we get to 50% less paper it just might be considered a scarce product and thus drive higher prices and more stable Wall Street conditions. Both of those possibilities I support, as printed products by then must be considered a luxury item and priced as such.
Still it is a huge move from what was to what will be. We can all argue about the numbers of my forecast, but I don’t believe that it will be wrong by more than 5%.

Anonymous said...

This whole situation has to be one of the most pathetic public display of business floundering I have ever witnessed. Watching the clowns running both of these companies try to turn a turd into a gold nugget - borders on the hilarious.
Both companies are wholly owned subsidiaries of two the largest TBTF "crony capitalist" banks on wall street - Goldman Sachs and JP Morgan. Swimming in debt there is no hope for either. When the theatrics end and the dust settles companies like Sappi will dominate the North American market while most of the NewVerso mills will be dismantled and sold as scrap. There might be hope for Quinnesec being bought by some other company and converted to the manufacture of dissolved pulp.

Anonymous said...

It's fascinating to me that the Newpage "bagholders" would allow this to go forward. Other than the first lien group, I'd think they'd be better off being attached to something that has a good chance to succeed - or at least not go bankrupt again vs. getting tied into a deal that is almost doomed to fail from the get-go.

Anonymous said...

Since 2008 the Federal Reserve has begun monetizing the US Govt's debt at an alarming rate. This money is then lent out at 0% interest rate to large banks like Goldman Sachs and JP Morgan who in turn lend it out to companies like New Page and Verso at rates anywhere from 5% -12%. It doesn't matter if the companies you are lending to have a viable business model or not. Being first lien holder - when you are lending out money that was essentially given to you and that you do not have to repay - really pays. Default - why should the banks worry? Its not their assets on the line. Ultimately - it is the US taxpayer who will pay - through higher inflation. This is what passes for "free market" capitalism in 21st century USA.
Meanwhile businesses (New Page) that should have failed a number of years back ( 2010) continue to exist producing a product (coated paper) that the market does not want.

on looker said...

It is apparent that annoymous has some deep seeded issues with a certain paper company. I would have to guess a verso/ex verso worker.