Special Report: Parsing the Implications of a NewPage-Verso Deal
While NewPage and Verso are reportedly in talks to deepen their relationship, a full-fledged merger is unlikely—though the implications of such a deal might not be as dire as some predict, publishing industry observers said this week.
The two companies, which together produce more than 50 percent of the coated paper used in North America, have been the subject of merger speculation since March 2010, when Apollo Management, which has a controlling interest in Verso, purchased more than half of financially-strapped NewPage's debt, leading many to assume Apollo was hoping for an eventual debt-for-equity swap and control of the company.
Apollo is in talks with Cerberus Capital Management, which owns NewPage, about ways to deal with NewPage's $800 million debt, PPI Pulp & Paper Week reported. The paper industry has been hit hard by the recession and market shifts, with the coated paper market thus far unable to regain profitability through price increases or consolidation.
A full-fledged merger would be unlikely to pass regulatory muster, notes pseudonymous blogger, D. Eadward Tree, who reports on publishing industry production and manufacturing news in his blog, Dead Tree Edition.
"Magazine publishers, printers, catalog companies, and other major buyers of coated paper would certainly cry foul if two companies controlling more than half of the continent's coated paper capacity tried to merge," he wrote on Tuesday. "But it's not clear whether Apollo would trigger any antitrust alarms if it obtained a sizable equity stake in NewPage by swapping debt for equity."
Anonymous commentators on the influential blog write that a debt to equity swap would likely come with representation for Verso on NewPage's board of directors, which could trigger anti-trust action by the federal government. On the other hand, a debt for assets swap (such as Verso's taking ownership of a mill) could avoid such action while freeing up cash for New Page to service remaining debt.
Any partnership between the two paper industry giants would certainly raise flags for the publishing industry.
"An outright merger of NewPage and Verso would give one company a huge amount of control over the magazine paper market in the U.S.," Tree told Publishing Executive. "A lot of publishers would definitely pick up the phone to call smaller producers and European mills so that they wouldn't end up being too dependent upon the new giant. I'll bet the real possibility of some less formal tie-up between NewPage and Verso already has some folks looking for new suppliers."
Alex Brown, founder of industry consultancy group Printmark, says any new relationship between Verso and NewPage would have to "pass through a number of practical hurdles before it resembles the dreaded ultimate domestic market consolidation that magazine publishers can, and should, fear."
It's also important, she says, to note that a NewPage bankruptcy (a very real possibility without Apollo's help) would not exactly bode well for publishers because it would deprive the industry of a major mill and have the same effect of reducing choice as a merger. Also, she says, even if Apollo gains an ownership stake, it does not guarantee Verso would have a management role.
"The antitrust implications look like a barrier, but companies have sometimes skirted such problems by demonstrating how large the overall market is, never mind that many of the purveyors and products are aimed at different segments," she says. "In short, for the Verso-NewPage Godzilla to be unleashed upon us, Apollo will have to link the companies, and the FTC will have to bless the merger. Neither is easily achieved."
But, as Brown notes, it's fair to ask if a merger would really "constitute doomsday."
Normally market consolidation leads to price increases, but even in the case of a NewPage-Verso merger, there are severe market pressures holding the price of paper down, Brown says. In addition to sagging domestic demand, there is the fact of globalization. Both Brown and Tree point to the possibility of more and more paper coming from Europe and Asia.
"Still," Brown says, "those two forces don't hold back all the possible disturbing outcomes. Any consolidation reduces choice, product innovation, and service. Any consolidation tends to increase prices, ultimately."
"... There are market watchers who believe consolidation is the only solution for the troubled overall economics in the paper industry," she continues. "If the cure is making the commodity still more of a commodity and spreading sales and administrative costs over larger volume, then some fusion of Verso and NewPage could help a sagging industry. But I have trouble believing that the cyclical demand complexities of the paper market can be fixed simply by cutting costs. The problem is much larger, and it has to do with who buys paper and why in an age that is increasingly headed toward presenting words and images on screens instead of pages."