Verso Paper inches one step closer to closing NewPage acquistion

Verso Paper Corp.' stock soared in trading Thursday, a sign of optimism the Memphis maker of magazine paper is one step closer to acquiring Ohio rivalNewPage Corp.

The two coated-paper producers announced the merger in early January, but the deal has been held up by Verso's bondholders. NewPage has said it will only agree to the tie-up if a portion of Verso's creditors agree to take less than the bond's value.

Verso's bondholders balked at an earlier offer made by the Memphis company, reasoning that gains created by the merger belongs to them, rather than the company's shareholders. On Wednesday, Verso announced it had launched a new debt exchange offer to its bondholders.

The holders of about $213 million in second lien debt, or 54 percent, have agreed to take a cut on the bonds they own, Verso said in a release Wednesday.

At least 70 percent of the second lien and subordinate creditors need to agree to the deal for the NewPage acquisition to close, according to Standard & Poor's analyst David Kuntz.

After the announcement, the market bid up Verso shares as much as 36.7 percent to $3.13 a share in early morning trading on Thursday, after closing at $2.29 on Wednesday. Trading volume was high with slightly over 1 million shares changing hands by 1 p.m. in New York on Thursday compared to an average daily volume of 118,810.

"Completing the exchange offers is an important step toward completing our acquisition of NewPage, which, pending antitrust clearance and the exchange offers closing, is still expected to close in the second half of 2014," Verso chief executive officer Dave Paterson said in a statement released by the company.

Verso and NewPage were both boom-era Wall Street bets on the glossy paper industry before the financial crash in 2008. Leon Black'sApollo Global Management LLC purchased the coated-paper division ofInternational Paper Co. of Memphis in 2006 for $1.4 billion, and named the company Verso Paper. While NewPage was created after Cerberus Capital Management bought MeadWestvaco's glossy-paper division for$2.3 billion in 2005.

In the years that followed, the companies' customer base eroded as online publishing disrupted the markets for catalog and magazine paper. Verso has reported four straight years of losses, while NewPage has fared even worse. NewPage filed for bankruptcy in 2011 and first tried to strike a deal with Verso while in bankruptcy. NewPage emerged from bankruptcy in 2012 with new ownership.

Chip Dillon, a paper industry analyst at Vertical Research Partners of New York, said the merger makes sense for both paper makers to capitalize on economies of scale in the mills.

"At the end of the day, it makes sense for the two parties to merge for them to reduce capacity and to put what is left on a better course," he said. "The demand for coated paper has gone down as a lot of magazines have gone out of business and overall circulation and readership has fallen. People are reading on their iPads or phones, they aren't reading magazines."

Dillon said while there is a standoff between Apollo and Verso's bondholders, they both stand to gain by striking a deal.

"The bondholders don't like that they have to take a haircut and Apollo comes out ahead, or rather, farther ahead" he said. "The ship is sinking and the two parties are on deck fighting each other." Haircut refers to bondholders accepting less for their bonds.

Wednesday's announcement marked a positive turn for Verso after Moody's Investors Service cut ratings of the coated-paper maker on June 22 reflecting the "elevated risk" the company will default on its debt, as well as weak liquidity and high leverage, the credit grader said in a report.

Moody's reduced Verso's rating to Caa3 from B3 and warned the paper maker could face a bankruptcy in the next 12 months if it is unable to close its $1.4 billion acquisition of NewPage.

The U.S. Justice Department also is reviewing the buyout over antitrust and compliance issues, Moody's said.

Verso employs about 100 workers in its East Memphis head office and nearly 2,000 in mills in Maine andMichigan.