Paper Industry Perspective
2nd Quarter 2014
Will Verso/NewPage merger occur?
By Jesse Marzouk
Amid continued weak
demand for coated paper
in North America, and
even worse for the coated
mechanical subsection of
the market, Verso Paper
Corp. is moving ahead
with its planned acquisition
of NewPage Corp. The
proposed acquisition
would create a coated
paper market giant with more than
50% of North American capacity
and a consolidated industry where
the top three producers would
control more than 75% of capacity.
The deal hit a blockade earlier this
year as some of Verso’s bond-
holders objected to the deal as
they were seeking a higher valuation for their bonds. As Verso
attempts to move past the bond
exchange offer issue, another
hurdle may come from the Department of Justice (DOJ). Given the
DOJ’s recent decision to strike
down the acquisition of Ainsworth
Engineered by Louisiana Pacific
(LP) in the oriented strand board
(OSB) market, is a similar fate
possible for the Verso/NewPage
combination? The DOJ cited likely price increases in the OSB market
as a reason for its decision against
the LP/Ainsworth deal. Coated
paper price increases surely are
quite possible following a combination of Verso and NewPage
Based on the DOJ’s recent
decision an argument certainly can
be made against the combination
of Verso and Newpage. The LP/
Ainsworth combined entity would
have been the largest in the OSB
market, but would have controlled
only 32% of OSB capacity in North
America. Furthermore, the industry still would have been much less
concentrated, with more firms
controlling idled capacity of OSB
mills.
Arguments for the Verso/
NewPage merger can also be made because of the weak de-
mand environment for coated
paper, an argument that is more
difficult to make about the OSB
industry in a recovering, albeit
slowly, housing market.
Whether or not the Verso and
NewPage deal ultimately is approved, the coated paper market
industry sorely needs to remove
capacity. Prices for coated paper
are down approximately $100 per
ton since the beginning of 2013
and it is estimated that on an
overall basis, the coated mechanical prices are only 5% above cash
costs on an industry-wide basis.
Such levels can’t be maintained,
even in the intermediate term,
without significant capacity reductions.
Jesse Marzouk is a vice president and forestry products specialist. He has
appraised numerous U.S. and Canadian pulp, paper, and lumber-related companies
involved in manufacturing and distribution. Jesse received his MBA in finance from
Kellogg School of Management at Northwestern University, and has a degree in
finance and accounting from Indiana University.