Paper Industry Perspective 4th Quarter 2015

Verso files for bankruptcy

By Jesse Marzouk

Since 2000, North American demand for graphic paper has declined approximately 50%. Graphic paper producers have tried a number of tactics to maintain and/or raise prices amid continual demand declines for their products. Most frequently, producers have removed capacity from the market in hopes of balancing supply and demand and consolidated to reduce competition. These measures have helped to some extent, with producers able to raise prices or keep them stable at different points throughout the last 15 years. Recent falling demand trends show that neither consolidation nor capacity reductions are resulting in the lasting effect that producers desire.

The most recent example of failed consolidation comes on the heels of Verso Corp.’s acquisition of NewPage. Only one year fol-lowing the completion of the deal, Verso filed for bankruptcy protection. The decline in demand for coated paper was the proximate cause and was exacerbated by the restart of the Port Hawkesbury Paper’s mill in Nova Scotia, whose production of supercalendered paper put pressure on prices of lightweight coated grades. Moreover, the strength in the U.S. dollar attracted imports from around the world, driving down market prices in the U.S.

Looking back at Verso’s acquisition of NewPage, and its current predicament, one must question the Department of Justice’s (DOJ) requirement for the divestiture of two NewPage mills as a condition of the acquisition. The DOJ argued that the combined Verso-NewPage entitiy would control too large a share of the lightweight coated paper market and would harm consumers by raising prices significantly. In the face of competition from supercalendered paper and continual demand declines for coated paper that range from 2% to more than 5% per year depending on the grade, the chance of a long lasting price hike for coated paper is almost unthinkable. If the DOJ would have taken into consideration more of the activity in other graphic paper markets, including newsprint and uncoated freesheet, it would have realized that consolidation in a declining market, even one with a single producer controlling more than 50% of capacity, would not result in higher prices over the long-term. Conversely it has been debated whether or not Verso would be much stronger if it had not been required to divest these mills. While Verso would have filed for bankruptcy regardless, the DOJ’s error in requiring divestment of the two NewPage mills has shined a light on potential acquisitions in other industries with intense competition. The most obvious of these is the potential Staples-Office Depot merger. The DOJ’s opposition to this transaction is almost certainly not justified with the numerous other brick and mortar, business to business and online competitors selling similar products.

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.