Justice Department Seems "Open-Minded" on Quad-LSC Deal

A printing-industry expert believes the federal officials who questioned him about the proposed merger of printing giants Quad and LSC Communications are unlikely to “rubberstamp” the deal.

“They were pretty open-minded,” said the expert, who was recently interviewed by a team from the U.S. Justice’s antitrust division. Although they kept their cards close to the vest, he says, they seemed genuinely interested in understanding claims that the two companies would have several monopolies or near-monopolies in what at first blush looks like a highly fragmented industry.

The printing expert, whom I know to be a reliable and knowledgeable source, spoke to Dead Tree Edition on condition of anonymity.

Silent publishers
Justice’s apparent open-mindedness comes despite no public opposition from publishers or other printing customers.

A publishing company executive tells me that a paper company contacted him in March as part of an effort to get publishers to object to the deal. It found that publishers were reluctant to speak up for fear of angering two key suppliers, he was told. (Also, it’s hard to get senior executives at magazine-media companies these days to even think about printing or anything else that’s not new and shiny.)

The printing expert mentioned to the Justice team the case of Verso and NewPage, two paper giants that Justice allowed to merge in 2015 on condition that NewPage first divest two mills.

At least one member of the Justice team was familiar with that case and indicated the same tactic had not been ruled out in the Quad-LSC case, the expert said.

The expert’s observations are in contrast to recent speculation from Peter Schaefer, a veteran of printing-industry mergers and acquisitions.

“My best estimate is I don’t think there’s going to be an antitrust issue” because the regulators tend to see printing as a single market, he told Printing Impressions last month. “Combined, they [Quad and LSC] are still going to be a small percentage” of the entire U.S. printing industry.

The only formal, public objection to the merger has come from a coalition of two authors’ organizations and an anti-monopoly advocacy group that pointed out how Quad (known until recently as Quad/Graphics) and LSC already dominate the long-run publication market.

The two companies reportedly have 100% share of the U.S. market for the printing of best sellers and certain other types of books. They also own all of the country's rotogravure presses that are typically used to produce catalogs, magazines, and free-standing inserts that have print orders of 1 million or more.

In addition, the two companies dominate the transport of magazines, do the vast majority of co-mailing of magazines and catalogs (to gain hefty postal discounts), and probably own a sizable majority of the large publication presses in the U.S. that are best suited for print orders in the hundreds of thousands.

Related articles:

• There’s No Such Thing as a Printing Industry 
• The Not-So-Secret Secret Behind the Quad-LSC Deal 
• Rival Print Giants Donnelley and Quad Not Looking To Get Hitched

Wiping Out Debt, Or Wiping Out . . .

"Restructuring" didn't keep Verso's
Bucksport, Maine mill from closing.

North American paper companies that used to rely heavily on the magazine industry have found two ways to survive: 1) make new products, or 2) undergo “financial restructuring” (our Publishing Word of the Day).

Verso Corporation, the country’s largest maker of magazine-quality paper, announced last week that it had financially restructured away $2.4 billion in debt, reorganized, and emerged from bankruptcy protection as a publicly traded company once again.

Plus, it got an additional “$595 million in exit financing to support ongoing operations,” including “an asset-backed lending facility.”

Market value after the first official day of trading: $406 million.

Like just about every other maker of coated paper on the continent, Verso’s "ongoing operations" now include using its machines to produce more “specialty” papers -- stuff like food wrappers that aren't affected by declines in the publishing business.

(Mr. Tree called his mortgage company to report that the remaining debt on his house is likewise six or so times his net worth and that he therefore qualifies for a financial restructuring to cancel the debt. Oh, and some asset-backed exit financing to support his ongoing operations would really help him write more “specialty” articles. The mortgage company offered to send over some sheriff’s deputies to provide exit assistance by hauling Mr. Tree’s assets to the curb.)

Shacking up
Verso's re-emergence officially ends its unusual relationship with competitor NewPage. The two U.S. companies sort of shacked up instead of getting married, sharing resources but remaining somewhat separate, in a financial restructuring so convoluted that even the bondholders didn't quite seem to understand it. The courtship, drawn out for a year by a federal antitrust review, lasted longer than the non-marriage itself did.

Poor Verso. It didn’t get the memo a few years ago that the rule of the publication-papers industry had become “He who gets to bankruptcy first wins.” Financial restructuring via the bankruptcy courts has already been the salvation of several competitors, though it didn’t do much for the stockholders or creditors.

I believe I’m correct in saying that every significant North American-based manufacturer of publications papers except one has been through a bankruptcy reorganization.

The exception is Kruger, which has heavily diversified into such products as toilet paper and wines. So while its competitors were financially restructuring to avoid getting wiped out, Kruger survived by helping its customers get wiped out.


Other recent entrants in our 31-part Publishing Word of the Day series include PMS envy and sugardaddying.

Rival Print Giants Donnelley and Quad Not Looking To Get Hitched

R.R. Donnelley and Quad/Graphics, the USA's two largest printing companies, apparently have their sights set on gobbling up more competitors -- but not each other.

Quad's CEO, Joel Quadracci, was caught off guard on Tuesday by a question from a Goldman Sachs analyst at the end of Quad's quarterly earnings conference call.

"I’d kind of love to hear your thoughts on potential regulatory pushback or maybe lack thereof on a tie-up between your company and your biggest competitor," said Fred Krom. Quadracci at first thought the question was about Courier Corp., which Quad recently planned to acquire until Donnelley stepped in with a higher offer.

Krom clarified: "I was actually referring to you and/or Donnelley but . . ."

"Oh, so me acquiring Donnelley?" Quadracci asked.

"You or vice-versa."

"We haven’t done any work on that and that’s not in our plans," Quadracci responded.

Donnelley officials were not asked the same question at their conference call Wednesday. But it's clear they have their hands full with Courier and several other acquisitions.

Though the U.S. printing industry is highly fragmented, certain segments are a true duopoly of only Donnelley and Quad. For example, they have North America's only rotogravure publication presses, making them the only real players that can compete for catalogs and magazines that have print orders in the millions.

So it's understandable that Quadracci wouldn't even dream of a linkup with his arch rival getting the approval of antitrust authorities.

But Goldman Sachs isn't known for asking idle questions.

Perhaps Goldman has noted that antitrust decisions involving print-media industries aren't necessarily logical: For example, the government took a full year to approve the merger of almost-bankrupt Verso Paper and just-out-of-bankruptcy NewPage, forcing a reshuffling of the industry that did little to preserve competitive markets for coated paper. But it didn't issue a peep last year when Quad bought Brown Printing, the duopoly's biggest competitor in the large-publication market.

Coated Paper Shakeup Leaves Most U.S. Capacity in Foreign Hands

Coated paper was invented in the United States, but after a major industry shakeup today most of the country's ability to make coated paper is owned by foreign companies.

This morning, two momentous events occurred nearly simultaneously in the industry that makes coated paper for catalogs, magazines, inserts, and brochures:

1) NewPage, the largest North American maker of coated paper, sold its Biron, Wisconsin and Rumford, Maine mills to Catalyst Paper, which shifted about 12% of the nation's coated-paper capacity into Canadian hands.

2) The purchase of NewPage by Verso, the continent's #2 maker of coated paper, was completed a year and a day after it was first proposed. The U.S Justice Department, fearing a combined Verso-NewPage would have too large a market share, required the sale of the two NewPage mills for the takeover to be approved.

This past summer, four U.S.-owned companies -- NewPage, Verso, Appleton, and FutureMark -- operated U.S. mills able to make about 4.8 million tons per year of the glossy paper. That was 65% of the country's coated capacity. The rest was in the hands of companies based in South Africa (SAPPI), Canada (Resolute and West Linn), Finland (UPM), and New Zealand (Evergreen).

Since then, FutureMark went out of business, Verso closed its Bucksport, Maine mill, and NewPage sold the two mills to Catalyst. That leaves two U.S. companies -- Verso and Appleton -- with coated capacity of 3.4 million tons, just under half of the country's total. The new Verso, though, is by far the largest manufacturer of coated paper in the U.S., with more than double the U.S. capacity of #2 SAPPI.

On Jan. 3, 2014, the stock price of Verso, which was seemingly on the verge of bankruptcy, was only 65 cents per share. It closed today at $3.37, an increase of 418% in barely a year.

Wisconsin-based Consolidated Paper invented coated paper in 1935, revolutionizing both the paper and magazine industries. But in recent decades, the innovations have come mostly from Western Europe and the investments have been concentrated in Asia. Even the tiny Canadian industry has out-innovated the U.S. companies, with the forerunner of Catalyst pioneering an efficient process of coating and calendering paper and Kruger building the newest machine.

Related articles:

• NewPage and Verso Find a Catalyst For Their Merger  
• The Monopoly That Haunts the U.S. Paper Market: USPS
•  Untangling the Verso-NewPage Deal

Ten Words That Summarize What Happened to Publishing in 2014

OK, fellow publishing fans, you can’t be ready to face this new year without understanding what happened in 2014. Here are the 10 words (yes, “magazine media” and “native advertising” are single words) that summarize the year that just was, along with links that provide further information:

1) Quorum: Demonstrating its indifference to one of the nation’s largest employers, Congress failed to act on fix vacancies on the U.S. Postal Service’s Board of Governors, causing it to lose its quorum. It’s yet another example of USPS’s “Congressional oversight” turning into “Congressional overlooking,” except when there’s a chance to name post offices. And it's another reminder to publishers of magazines and daily newspapers that our primary means of distribution is still at risk.

Leaked Google document showed its preference for web sites
associated with print brands.

2) Penguin: As they watched their search-related web traffic soar, magazine and newspaper publishers came to realize that the evil empire of Google had now turned friendly. With its Penguin and Panda algorithm tweaks and other enhancements, the search giant increasingly referred people to credible web sites anchored by trustworthy print brands. Late in the year, Facebook also jumped onto the We Love Print Brands bandwagon.

3) Magazine media: Magazine people laughed at first at this new moniker for our industry. But now that a few magazines get a majority of their revenue from digital media and almost all have branched out into multiple non-magazine ventures, 2014 was the year the MPA-created term began to stick. We're not just magazine publishers any more, we tell anyone who will listen, but we're still having trouble figuring out exactly how to describe ourselves. That’s in stark contrast with daily newspaper publishers, who know exactly what they are: Screwed, unless they can find a patient billionaire to buy them.

Wholesaler's bankruptcy led to empty magazine racks.

4) Niche: Every month, it seemed, brought another web site that decided to delve into the magazine business, mostly with highly targeted publications. But the traditional consumer-magazine world of bloated circulation and egos continued shrinking, with stalwarts like Ladies Home Journal shutting down, others reducing their ratebase, and a major magazine newsstand distributor going belly up. A testament to the industry’s increased nichification: The number of U.S. magazines keeps growing, but the nation’s coated-paper industry finished the year with half the capacity it had just 11 years ago.

5) Antitrust: The U.S. Justice Department didn’t bat an eye when Quad/Graphics turned the large-publication printing market into a virtual duopoly by buying out Brown Printing. But it dithered for nearly the full year about the proposed merger of ailing paper makers Verso and NewPage, finally approving the deal on Dec. 31 -- but only after a major divestiture. These, after all, are the same antitrust geniuses who, deciding Amazon’s 90% share of the ebook market wasn’t big enough, went after Apple and major book publishers.

A destroyer of printed books and magazines? Nope.

6) Plateau: Even the enthusiasts who predicted a few years ago that ebooks would soon dominate the book scene finally started admitting in 2014 that ebook sales in the U.S. had reached a plateau, with a market share of less than 25%. Another supposedly disruptive force, digital magazines, also ran out of steam after achieving a much smaller share of the U.S. magazine market. The collapse of digital magazines is being aided by consumers’ shift from tablets to smartphones and abetted by Apple’s incompetence and indifference, as demonstrated by the woeful state of its Newsstand app.

7) Accountability: Advertisers began awakening to the reality that they were being duped by social-media marketing enthusiasts (“Let’s get everyone on Facebook to join the conversation about our toothpaste!”), content-marketing hucksters, and advertising impressions targeted at bots. Kraft even fired most of its advertising agencies, apparently deciding that targeting ads to people who Google “gang rape” is not the best strategy for selling “Pasteurized Prepared Cheese Product" (Velveeta).

8) Measurement: With the rising emphasis on accountability came a growing interest in measurement. The advertising industry started pushing for new ways to measure how many people see a web ad, and for how long, after realizing that a majority of the advertising “impressions” served by ad networks were never visible to an actual human being. Meanwhile, the MPA moved the goalposts on the measures of magazines’ success, emphasizing growing web audiences and omitting the depressing news about trends in ad pages.

9) FutureMark: The closure of FutureMark Paper, which was the only North American manufacturer that made coated paper containing mostly recycled fiber, provided stark evidence of a troubling development: Publishers, and perhaps the public, seem to have lost interest in using environmentally friendly paper. Or perhaps they are having trouble distinguishing between “green” and “non-green” papers.

10) Native advertising: Pundits, editors, and marketers spent the entire year debating whether native advertising was a savior or sellout for publishers. It would help if the debaters could agree on a definition for what they’re arguing about. Is it native only if it masquerades as editorial content? Does native necessarily involve the co-opting of journalists? What’s clear is that marketers are becoming disillusioned with banner ads but still see the web sites of reputable publishers as attractive venues for engaging the hearts and minds of potential customers.

For further reading: 

• Is Print Really Killing Publishers?

• Who Killed the Magazine App?: 9 Suspects

• Are Printed Magazines Growing or Shrinking? Yes

NewPage and Verso Find a Catalyst For Their Merger

Update: The Justice Department announced on Dec. 31 that the Catalyst deal will satisfy its antitrust concerns about the Verso-NewPage deal. Both the Catalyst deal and the Verso-NewPage deal were completed on Jan. 7, 2015.

Today's announcement that Catalyst Paper will buy two NewPage coated-paper mills apparently means that the merger of NewPage and Verso Paper will move forward.

Catalyst revealed that it will purchase NewPage's Rumford, Maine and Biron, Wisconsin mills for $74 million -- more than quintupling the Canadian company's capacity for making coated paper. One condition of the sale is that Verso-NewPage deal be consummated.

That merger has been delayed by federal antitrust officials, who were apparently concerned that, by owning half of North America's capacity to make coated paper, a combined Verso-NewPage would have too much market power and be able to drive up prices. NewPage's sale of the two mills, coupled with Verso's decision to close its Bucksport, Maine mill, were presumably a condition of gaining the U.S. Justice Department's approval for the merger.

Catalyst would only pay about $85 per ton of capacity to make paper that typically sells for at least $850 per ton. That looks like a fire-sale price, except that the continent's demand for coated paper is half of what it was barely a decade ago. And except that we've seen this movie before, and the ending wasn't pretty.

Justice allowed the 2007 merger of newsprint giants Abitibi and Bowater to go forward only after Abitibi unloaded one of its gems, a 100%-recycled mill in Snowflake, Arizona, to Catalyst for a bargain price. But a few years later, Snowflake hit a perfect storm -- Chinese buyers driving up the price of West Coast recycled paper, black liquor tax credits subsidizing competitors using virgin pulp, and the collapse of the U.S. newspaper industry -- and was shut down.

Both AbitibiBowater (now called Resolute Forest Products) and Catalyst ended up going through bankruptcy reorganization and emerged as smaller but healthier companies.

Catalyst makes mostly newsprint and uncoated papers in western Canada, but does have a single machine making coated groundwood paper.With the purchase announced today, Catalyst would pick up four machines that make coated freesheet as well as coated groundwood paper, plus some market-pulp capacity.

Related articles:

• Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts 
• Odd Verso-NewPage Structure Eyed Warily by Wall Street 
• Another Recycled Newsprint Mill Is on the Ropes

The Postal Service Giveth, and the Paper Market Taketh Away

October began with both good news and bad news on the cost front for publishers of magazines and catalogs.

Because of announcements made on Wednesday, publishers can scratch the usual January postage rate increase from their 2015 budgets but should probably count on price increases for coated paper.

The U.S. Postal Service Board of Governors announced it would not raises prices on "market-dominant" mail classes early next year, contrary to its usual practice of implementing inflation-based price hikes in January. They have the authority to raise rates 1.58%, which could have led to a 1-cent increase for Forever Stamps as well as higher postage for direct mail, catalogs, newspapers, and retail flyers.

"The governors decided not to seek a change for mailing and shipping products and services in January in part because of the uncertainty regarding the exigent price increase.The Postal Service will continue to evaluate pricing strategies and will communicate about any potential price change filings in early 2015, including advance notice to customers of any price changes."

As noted in Postal Rates in 2015 Could Rise or Fall -- or Do Both, USPS is currently slated to reduce market-dominant rates by 4.3% in the second half of next year when the exigent surcharge expires. But postal officials have gone to court in hopes of increasing or extending the surcharge. And they hope to avoid a price cut when the surcharge expires by implementing an inflation-based price hike at the same time.

The bad news came from Verso Paper, which is closing its Bucksport, Maine coated paper mill. That, coupled with the recent closure of the FutureMark mill in Illinois, could mean an end to rock-bottom prices for magazine-quality paper in 2015.

Verso revealed that Bucksport has been unprofitable for years. Paper industry insiders say the same is true of FutureMark. As the old saying goes, the best way to make a small fortune in the paper business is to start with a large fortune.

Verso, teetering on the edge of bankruptcy, says the Bucksport closure will not affect its proposed merger with NewPage, which is under extended antitrust review by the U.S. Department of Justice. By the time Justice gets done, there may not be anything left of Verso to merge.

Related articles:

• The Monopoly That Haunts the U.S. Paper Market: USPS 
• Forever Stamps: Not a Sexy Investment
• Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts

The Monopoly That Haunts the U.S. Paper Market: USPS

When it comes to protecting buyers of coated paper from price-gouging, monopolistic suppliers, the federal government has its eye on the wrong targets, an industry analyst says.

The U.S. Department of Justice seems likely to force NewPage and/or Verso Paper to divest at least one paper mill, Verle Sutton wrote this week in his subscription newsletter The Reel Time Report. DOJ is concerned that combining North America’s two largest makers of coated paper would give the new company the power to drive up prices.

History says otherwise, Sutton wrote: “Publication paper prices have been nearly flat (cyclically) for more than thirty years,” he wrote.

“On the other hand, out-of-control postage costs have been an almost insurmountable problem for print advertising customers and, in fact, have led to many bankruptcies, catalog/magazine closures, and paper demand losses to electronic competition,” Sutton added.

Antitrust irony
“Postage costs have escalated sharply for decades, but particularly in the last decade. It is ironic that one government agency (the DOJ) is chartered to make sure there is no possibility of 'unilateral reductions' or 'coordinated effects' in the coated paper business, when the vastly more serious cost problem for print customers is an incredibly inefficient government-sponsored monopoly.”

The bulk of coated paper purchased in the U.S. ends up in the U.S. Postal System in the form of catalogs, magazines, direct-mail pieces, etc. But Sutton is only half right: Yes, rising postage rates are suppressing demand for such items.

But what really hurts is that customers are making strategic decisions knowing that USPS’s future is in the hands of a deadlocked Congress for which "postal-reform legislation" means trying to repeal the laws of supply and demand.

Related articles:

• Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts 
• UPS Praises Postal Service’s Improvements, But Not Its Rate Hike 
• Affordable Postage A Key To Printing Industry’s Future, Quadracci Says

A Shortage of Paper? You've Got To Be Kidding!

Demand for graphic papers keeps dropping, usually faster than the industry can reduce capacity. Struggling paper mills are often playing a giant game of chicken, scuffling along on thin margins (or negative margins) in hopes that a competitor will shut down a machine to balance the market.

So why are paper companies suddenly announcing price increases for coated paper, and why is the biggest printer in the U.S. worried about possible paper shortages?

SAPPI surprised nearly everyone late last week by announcing a $40/ton price increase on coated freesheet (CFS) in the U.S. Then Verso delivered an even bigger shock this week with $40 hike not only on CFS but also on coated groundwood (CGW), which is in even greater oversupply than CFS.

But, first, let’s look at the rather cryptic statement from a recent R.R. Donnelley filing with the Securities and Exchange Commission:

“Management believes that the paper supply is consolidating, and there may be shortfalls in the future in supplies necessary to meet the demands of the entire marketplace. Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products,” the document said. “Contractual arrangements and industry practice should support the Company’s continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable the Company to successfully do so.”

What does Donnelley know that the rest of us don’t? With or without consolidation, how do you run out of something when demand for it is declining?

Donnelley seems to be worried about the proposed merger of Verso and NewPage, North America’s two largest makers of coated paper. “NewVerso" would control half the continent’s capacity for coated paper, which could stifle Donnelley’s legendary ability to negotiate very huge and very sweet deals.

The paper giant could play the “Our way or the highway card,” as NewPage has often tried to do (usually more to its own detriment than that of its customers). And it may be in a position to balance markets by aggressively idling or shutting capacity.

If the merged company is successful, smaller competitors might give up on certain parts of the market. Then a single NewVerso miscalculation – about demand or imports, for example – could quickly lead to shortages.

And if the highly leveraged company isn’t successful, Donnelley’s (and everyone else’) ability to secure coated paper could depend upon the mercurial moods of a bond market that cares nothing about the health of the paper, printing, or publishing industries.

Or maybe Donnelley is saying, “We really don’t know what consolidation of the paper industry will mean to us, but it could be a big deal. So our lawyers told us we’d better cover our donkeys in case a few know-it-all private-equity boys screw everything up.”

As for the nearer term, market participants say SAPPI’s move is a bit early and aggressive, but there is some hope that capacity reductions, the strong euro, a decent economy, and this year’s election will bring the CFS market into balance later this year. SAPPI is trying to set the table for a July 1, or maybe an Oct. 1, price hike for contract customers who have quarterly price protection.

“They’ll need others to follow and for demand to pick up for it to succeed,” one paper broker commented.

But Verso’s move on CGW seems to be more a matter of wishful thinking by a money-losing supplier. And so far it’s been met with silence by competitors. CGW faces two challenges that CFS doesn't: 1) High-quality supercalendered (SC) paper, which increasingly competes with CGW for some applications, but at a lower price. 2) The weak loonie (Canadian dollar), which means Canadian CGW and SC makers are happy to grab market share in the U.S. by pricing more aggressively than their American counterparts.

Here’s how one paper-market veteran summed up the pricing announcements: “Watch everyone announce, then [watch] the guessing game of who actually went up and who maneuvered for market share. All in all, they probably each have some bottom business they can raise, and that's who it [the price hike] will be applied to.”

Related articles:

• Untangling the Verso-NewPage Deal
• Odd Verso-NewPage Structure Eyed Warily by Wall Street
• 10 Reasons Coated Paper Is Ripe for Collusion  

10 Reasons Coated Paper Is Ripe for Collusion

The proposed merger of NewPage and Verso Paper may be on the ropes, but it has brought much attention to the oddities of the U.S. market for coated paper.

Intrigued by the unusual proposal (which Verso was forced to reconsider last week), the bankruptcy experts at The Capitol Forum recently published comments from a federal prosecutor explaining why the U.S. coated-paper industry is prone to cooperation among competitors.

The U.S. Department of Justice’s likely presumption that the merger would encourage “coordinated interaction” of competing companies could be a stumbling block for the merger, according to The Capitol Forum (subscription only).

The article made me realize something I had never thought about: Though coated-paper companies have the means and the motive to cooperate on pricing, the same is not true for publication printers, even though they have a similar customer base. The anonymous prosecutor’s comments, The Capitol Forum’s analysis, and my own experience inspired this list of 10 reasons the U.S. market for coated paper is prone to collusion, both legal and illegal:

1. Price transparency: The prosecutor, who participated in the 2006 prosecution of Stora Enso and UPM on price-fixing charges, noted that “coated paper pricing is very transparent—a firm will announce a price increase to take effect at a future date, and wait for other competitors to follow,” The Capitol Forum said. [Editor’s note: Paper companies rarely announce price decreases, which tend to occur in a less orderly fashion.] 


2. The tradition of quarterly price changes: Except for spot purchases, most deals for coated papers involve quarterly adjustments based on market conditions. That, coupled with those publicly announced price increases, means competitors can implement a price increase simultaneously without ever communicating directly with each other. 


3. Concentrated market: No company has a large enough market share to push prices up unilaterally. But, for most grades, it only takes about three major players acting more or less in unison for a price move to stick. The Department of Justice probably views a NewPage-Verso merger as making such pricing coordination even easier for the mills, according to The Capitol Forum. By contrast, the printing industry is more fragmented, despite massive consolidation.


4. Mutually assured destruction: With stable supply and declining demand, paper companies are tempted to keep the machines running by pricing aggressively to grab market share. But they know that if competitors follow suit, they all lose. Paraphrasing the prosecutor, The Capitol Forum explained that “because declining demand can result in lower prices, firms in distressed industries may have the incentive to collude to stop further price declines. By contrast, when demand is steadily increasing, there may be less incentive to collude because coordination may not be necessary to make price increases stick.” 


5. Near commodity: Those price-increase announcements are meaningful because a statement about a “$60-per-ton increase for coated groundwood” is immediately understood by buyers and competitors. (Whether the price increase is fully implemented is another story.) Commercial printers make no such public announcements because there is no single price for printing; printing contracts often have multiple-page price lists. 


6. Not quite a commodity: Coated paper, however, is not such a commodity that it can be traded in the pits like soybeans or pork bellies. Varying roll sizes, basis weights, finishes, and transportation arrangements make each order a custom-manufacturing job. (There was one company that tried to create a futures exchange for pulp and coated paper. It was called Enron.)


7. Built-in market intelligence: Mills sell much of their output through paper brokers that also represent competitors. Those brokers can provide insight into competitive pricing and act as an indirect communications channel if a mill wants to signal competitors that it will hold the line on pricing. Many major customers also buy from more than one mill, so mills can glean information about what their competitors are up to by observing customers’ order volumes and how they negotiate on pricing. By contrast, most of those customers buy printing directly from the printers and use only one publication printer. 


8. Stable demand: In the short run, demand for graphic paper is inelastic – that is, not affected by prices. It takes months for a major catalog or magazine to carry out a plan of reducing pages or copies, so paper companies assume a 5% change in prices will mean a 5% change in revenue. (Demand for paper is more elastic in the long run, but paper executives – like postal executives and politicians – don’t think about the long-term effects of pricing.) 


9. The uncoated freesheet example: The North American market for uncoated freesheet paper (copier paper, for example) is a near duopoly. Despite having low production costs, the two big players would rather shut down machines than chase market share. This “market discipline” strategy has been profitable for the mills, as both Wall Street and the coated-paper manufacturers know full well. 


10. Safety valves: Idling a machine during slack times is a money loser: Employees still have to be paid, and the bondholders still want their monthly payments. But mills have ways of keeping the machines running without flooding their markets, such as by making more paper for export markets or turning off the coaters to produce uncoated products. Printers don’t have such options.

Related articles:

• Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts
• The Infamous UPM-Stora Meeting 
• Odd Verso-NewPage Structure Eyed Warily by Wall Street

 

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.

Related articles:

• Odd Verso-NewPage Structure Eyed Warily by Wall Street
• Untangling the Verso-NewPage Deal
• The Infamous UPM-Stora Meeting

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

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.

Related articles:

• NewPage-Verso Merger Unlikely, 2 Experts Say 
• Verso Changes Course -- Why? 
• Are NewPage and Verso Headed to the Altar? 
• How About a NewPage-Quad/Graphics Merger? 
• Did Verso Come To Purchase NewPage Or To Bury It? 
• NewPage, Verso Owners Reportedly Discussing a Deal

 

 

How About a NewPage-Quad/Graphics Merger?

After finally emerging from bankruptcy protection, with a much lighter debt load, NewPage Corp. clearly has merger on its mind.

Why else would North America’s largest maker of coated paper choose as its chairman Mark A. Angelson, the U.S. printing industry’s Great Consolidator? And why else would he accept the job?

Only four months ago, the man who led the rolling up of such major printers as Worldcolor, MooreWallace, and Banta quit an apparently successful run as deputy mayor of Chicago so that he could lead “a somewhat less frantic life.”  It seems unlikely that he took hold of the NewPage reins simply to be caretaker of a stable company in a declining industry. As I’ve noted before, even his initials are M&A.

Further consolidation of the paper industry is inevitable, but could Angelson & Co. have something more radical in mind? Like maybe a marriage with a printing company? Like maybe Quad/Graphics, the continent’s #2 printer?

This is pure speculation, and it might be totally crazy, but hear me out:

The Biggest Stories of 2012, the Year of No

It's been a year of "no" in this little corner of the universe -- no postal reform, no big paper merger, no more listing on the RISI Top 50, no major bankruptcies. There was even a double negative: no No Print Day.

The hot topic this year for Dead Tree Edition readers has been retirement: Nine of the 10 most-read stories dealt with efforts (or lack thereof) to downsize the U.S. Postal Service workforce by getting more employees to quit.

Here's a brief recap of the year's highs and lows:

• Most popular article: By a landslide it was USPS Planning Retirement Incentives To Help Downsizing, Donahoe Testifies, with 42,000+ page views, more than double that of any other story.
• Most commented article: 8 Reasons USPS Productivity Is Declining: The Employees Speak Out, with a whopping 74, including many insightful responses from the Postal Service's front lines.
• Most influential article: Some would say it was Greenpeace Sticks It To Toshiba: Company Has No Paper Policy because an embarrassed Toshiba pulled the plug on its hypocritical No-Print Day the next day, but I suspect that was a coincidence. My vote is for 10 Questions About Toshiba's No-Print Day, which nine days earlier brought Toshiba's greenwash effort to the attention of a fairly small audience, but an audience that quickly spread the word to more influential writers and

What's the Future for the Paper Industry? Depends

The paper market's long-term decline has now spread to the fictional Dunder Mifflin Paper Company: "The Office" had the worst premiere in its nine-year history last night.

The episode had the show's second-lowest audience ever, attracting "just 4.32 million viewers, down 46 percent among 18–49-year-olds from its premiere last year," reports Vulture.com. In other words, the once-hot comedy centered around a dysfunctional paper company (Aren't they all dysfunctional?) is dropping as fast as newsprint demand.

It's not just newsprint that's shaky. A deal to restart the NewPage supercalendered machine in Port Hawkesbury, Nova Scotia fell through today (Sept. 22 update: and then was resurrected); its shaky status means that North America's only world-class, magazine-quality paper machine is in danger of being shipped to another continent or scrapped. And North America's second-largest player in the magazine category (Verso Paper) is at a competitive disadvantage not because it may be on the verge of bankruptcy reorganization but because several competitors have already been through or are in the Chapter 11 debt-cleansing process.

Declining demand means fewer paper machines are needed, but fortunately some of the idled machines are being put to good use. Several that once made copy paper have been converted recently to producing fluff pulp, the main ingredient in diapers.

Here's how to understand the trends: The bad news for pulp and paper companies is that Baby Boomers are reaching senior-citizen status, leaving fewer dinosaurs in the workplace who still print out their emails to read them. The good news is that the aging of the Baby Boom means more people on the continent are incontinent, which is boosting demand for hygiene products that rely on fluff pulp.

Related articles:

• Under Siege: The Outlook for Print Media Is Even Worse Than We Thought, Expert Says -- But Publishers May Prosper  
• A Glimmer of Hope for the Port Hawkesbury Mill  
• Verso Changes Course -- Why?

Verso Changes Course -- Why?

Only three weeks after Verso Paper’s CEO said acquiring NewPage was the key to its future, Verso announced it no longer wants to buy its rival. Why the sudden change of heart?

In a mid-August interview with The (Memphis) Commercial Appeal, Verso CEO David J. Paterson said that the company’s key strategy is acquiring ailing companies “to get the cost reductions we can't get on our own.” NewPage, which is in Chapter 11 bankruptcy reorganization, is Verso’s only publicly announced target.

But last week Paterson issued a statement saying, “After careful analysis, we believe it is in the best interests of our company and its stakeholders to focus on the many other opportunities for Verso, including internal growth projects and other potential strategic alternatives.”

Verso's new tack is something of a mystery. Chip Dillon, a long-time forestry industry analyst, announced yesterday that his Vertical Research Partners is dropping coverage of Verso because the company’s future is so unclear. He sees “the restructuring of Verso’s debt as inevitable” but is not sure how or when that will happen.

Among the possible reasons that Verso is no longer courting (or stalking) NewPage: 

• Hard to get: Verso’s latest move may be a negotiating ploy to wrest a better deal out of NewPage. 

Sartell Shutdown Will Cost Verso Dearly

Shutting down the Sartell, Minnesota paper mill will cost Verso Paper Corp. more than the entire company is worth, Verso revealed yesterday.

The Memorial Day fire and explosion at the mill, which has already cost one employee his life and 265 others their jobs, will result in shutdown costs of approximately $114 million, Verso stated in its quarterly earnings report to the Securities and Exchange Commission. (See excerpt below.) The company’s stock, beaten down by concern about the company’s long-term viability, was worth just over $75 million at the end of the day.

Most of the cost will be for “non-cash” charges to write down the value of Sartell’s plant and equipment. But Verso, North America’s second largest maker of coated paper, estimates it will need cash outlays of about $33 million, most in the current quarter, for severance and other shutdown costs.

“Settlement negotiations regarding this loss claim with our insurance carrier are continuing and we expect resolution in the coming months,” the Verso report said.

Did Verso Come To Purchase NewPage Or To Bury It?

Talk about the pot calling the kettle black: NewPage told a bankruptcy court this week it is reluctant to merge with Verso Paper because of its rival’s high risk of going bankrupt.

But it also revealed an even bigger reason to rebuff Verso’s advances: Rather than engaging in a good-faith effort to forge a union between North America’s two largest makers of magazine-quality paper, NewPage said, Verso’s owners are engaging in “tactics of holdup and delay” to weaken NewPage and hinder its emergence from bankruptcy protection.

NewPage’s bankruptcy case presents Verso “with both significant opportunities and risks,” an attorney representing holders of first-lien debt wrote to the bankruptcy court today.

“On the one hand, Verso’s market position will be greatly improved if Verso is able to acquire NewPage’s assets at fire-sale prices, or if the Debtors fail to successfully reorganize [NewPage],” Dennis F. Dunne wrote.

“On the other hand, Verso is significantly threatened by the possibility

NewPage's Fraudulent Deals Started in 2007, Creditors Claim

Four years before it went into bankruptcy protection, NewPage Corp. was essentially structured as a giant scheme to defraud suppliers and other creditors for the benefit of its owners, a creditors committee charges.

The creditors committee wants the bankruptcy court to declare as “fraudulent transfers” the highly leveraged 2007 transactions that enabled NewPage to become North America’s largest producer of magazine-quality papers and the 2009 refinancing of that massive debt.

The Official Committee of Unsecured Creditors is also trying to claw back millions of dollars in “excessively high” management fees paid to leveraged buyout firm Cerberus, NewPage’s primary owner, and millions more in bills paid to two suppliers that are subsidiaries of Stora Enso, a European paper company that owns 20% of NewPage.

The U.S. Bankruptcy Court appointed the committee to advocate for the interests of companies that were left holding accounts receivable but no collateral when NewPage filed for Chapter 11 bankruptcy protection on Sept. 7, 2011. The committee consists of representatives of organizations that stand to lose millions of dollars resulting from NewPage’s insolvency, including the Pension Benefit Guaranty Corporation, Deutsche Bank, OMNOVA Solutions (a major supplier of specialty chemicals to the paper industry), and United Steelworkers.

NewPage’s owners have challenged whether the committee has the right to press its claims in bankruptcy court. The court has not ruled on that question yet.

Among the creditors’ claims are:

Destined to fail
NewPage’s 2007 acquisition of Stora’s North American paper mills left it “with a crippling amount of new debt, but without any new value to show for it. No new equity was injected whatsoever. The target Debtors [the various NewPage subsidiaries] simply had new owners. Hobbled by this