Verso calls off merger with NewPage

Editor's note: New York investment manager Apollo Global Management LLC's Apollo Management unit said it owns the largest stake in Memphis-based Verso Paper Corp. An earlier version of this story, published Sept. 6, incorrectly said AP Alternative Assets LLP, a unit of Apollo Global, was the biggest shareholder. AP Alternative Assets owns a minority stake in Verso.

Verso Paper Corp. of Memphis has called off a possible merger with bankrupt Ohio rival NewPage Corp.

Investors who control the two paper makers, including New York hedge fund billionaires Leon D. Black and Marc Lasry, apparently couldn't agree on terms.

Calling off a merger could edge the ailing Memphis company closer to bankruptcy, analysts say. Magazine and catalog publishers have ramped up digital content and buy less of the glossy paper that Verso specializes in. To stave off financial danger, Verso had sought a merger to get hold of NewPage's customers. Yet another deal could emerge later.

Verso released a brief statement on Wednesday saying it had "decided to cease further discussions" with NewPage and also could look for "internal growth" and "other potential strategic alternatives." Alternatives apparently could be other merger candidates. David Paterson, Verso chief executive officer, did not return a call seeking comment on Wednesday, but he raised the idea of other possible deals in an interview in August.

"If we can't do NewPage, what we do next is not going to shake up anyone in the industry," Paterson said, referring to looking for other deals.

Few big paper makers on the scale of 7,000-employee NewPage remain in business, however. The industry has consolidated through years of bankruptcies and mergers — Memphis-based International Paper Co. sold 2,500-employee Verso in 2006. In looking for scale, said paper industry analyst James Armstrong, Verso might have to buy small companies and bits of larger companies like Resolute Forest Products Inc., which recently closed a 100-employee line in South Carolina that made magazine paper.

Resolute is the Montreal company that Paterson led out of bankruptcy in 2011 when it was named AbitibiBowater Inc. He joined Verso in May.

While Verso has lost about $350 million in the last two years, bankruptcy is not imminent. That's largely because the company gained time this spring by renegotiating some large debts. They now come due in several years.

"Verso isn't bankrupt but they will have to restructure at some point in time," said Armstrong, vice president of Vertical Research Partners, a New York firm that studies companies for investors. "People are reading less and we're getting less advertising in the mail. I don't see how Verso gets its (cash flow) up high enough (in several years) to support the current debt loads."

Bringing in larger NewPage's customer base was going to be one answer. Verso this summer disclosed merger talks among NewPage's second-lien debt holders. On Wednesday, Armstrong said he figures "they couldn't come up with an agreement about who would be paid less. I think the NewPage bondholders did not want to take the reduction that Verso was offering."

Avenue Capital Group and Apollo Global Management, a pair of New York hedge funds, together control more than half of NewPage's $806 million in second-lien debt and also are the largest stockholders in Verso.

Over the last decade, New York hedge funds jumped into the paper industry, hoping to streamline and sell off companies for a profit. Plans went awry when the 2008-09 recession hammered paper sales, and publishers moved with surprising swiftness to online content.

Two thirds of Verso shares are in the hands of five investors. Apollo, the $100 billion hedge fund run by Leon Black, acquired Verso from International Paper and took the company public.

Apollo Global controls the most shares, according to reports filed with the U.S. Securities and Exchange Commission. The others are Marc Lasry, the billionaire in charge of Avenue Capital Group; Aristeia Capital LLC, a $460 million hedge fund run by the son of a former Deutsche Bank managing partner; Lombard Odier Asset Management, a Swiss bank; and 1798 Global Partners Ltd., an arm of the Swiss bank chartered in the Cayman Islands.