Paper Industry Perspective 4th Quarter 2014

Verso acquires NewPage

By Jesse Marzouk

Paper Perspectives Graph Q4 2014Approximately one year after it was announced, Verso Paper Corp.’s acquisition of NewPage Corp. was given final regulatory approval and consummated on January 7, 2015. The acquisition was done in an attempt to consolidate the North American coated paper market, as it has faced significant demand destruction amid electronic substitution and competition from lower-end grades, such as supercalendered paper (SC). The combined entity, which has been renamed Verso, will operate eight mills with sales of $3.5 billion annually. Verso now maintains approximately 24% of North American capacity for coated mechanical paper (CM) and 52% of North American capacity for coated freesheet paper. Its share in the CM market was diluted after the U.S. Department of Justice forced Verso to sell two mills as a condition of the acquisition. The two mills were purchased by Catalyst Paper, which now controls approximately 31% of CM capacity in North America.

While some are hopeful that the merger will lead to pricing power in the market, Hilco believes that it will do little to change prices. Price increases for CM paper were recently announced, but they were on the back of mill closures that resulted in an approximate 13% reduction of North American capacity for CM and SC. Over the last few years, the only times that prices for publication papers increased was when producers shut a significant (greater than 10%) percentage of capacity within a certain grade. This was the case when producers closed approximately 10% of capacity in the uncoated freesheet (UFS) market at the end of 2013. Prices for UFS rose approximately $80 per ton, but this was less than the reduction in prices that occurred over the prior few years.

A similar fate is likely for producers of CM paper, who will enjoy the benefits of higher prices in 2015, however, they almost certainly will be less than prices were a few years earlier. Producers are hesitant to raise prices too much from fear of substitution from other grades and further demand destruction. To compound the matter for North American producers, the strength of the U.S. dollar against the euro and other currencies is going to attract imports into a market that is already weak. Specifically for producers of CM and SC, Europe is a significant producer of SC and is expected to take advantage of higher prices in North America this year.

Jesse MarzoukJesse 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.