Paper shuffle: A year after its IPO, Verso scrambles against changing markets while NewPage bides its time
Photo/Amber Waterman, Sun Journal
The Verso paper mill in Jay
Photo/David A. Rodgers
Carlo Puiia, Rumford's town manager, says NewPage paper mill managers have told him they believe the economy is improving. So far, the paper company has been able to mitigate the effects of a depressed market by rolling layoffs and coordinating shutdowns.
Last year, Verso Paper Corp., which has paper mills in Bucksport and Jay, made the bold move to go public right as the economy was darkening. It was May 2008, and though there were reports in the news about shaky mortgage deals and teetering markets, no one was ready to declare an outright recession.
Meanwhile, NewPage Corp., with a mill in Rumford, also filed IPO paperwork with the U.S. Securities and Exchange Commission around the same time. But it retreated from its plan, and continues to wait for more auspicious market signals to go public, according to company officials.
Verso, though, forged ahead. It quickly felt its first chill upon opening its initial public offering on May 15. It netted about $154.2 million, selling 14 million shares of stock for a starting price of $12 a share, which quickly slipped down during trading to around $10. The company was disappointed; it had anticipated raising $300 million by offering 18 million shares for as much as $18, according to news reports at the time.
Since going public, Verso has failed to post a profit, despite increasing its annual revenues 8.5% from 2007 to 2008. The company, which paid a portion of its $152 million debt with the IPO proceeds, is not selling enough to overcome operating costs. Shares at their lowest were trading in the range of 30 cents to 40 cents, according to paper industry analyst Kevin Mason, before recently getting a boost from an alternative fuels tax credit that has plowed billions of dollars into floundering U.S. paper manufacturers. (See “Fueling tax credits,” below.) At the market close of June 30, Verso stocks were trading at $1.23.
Now a little more than a year after going public — a year when the economy plunged and paper markets crumpled — Verso is rethinking its business strategy and retooling its product lines, claiming it will be an even stronger player in the cutthroat global paper industry once the economy rebounds.
Verso, like all paper manufacturers, has to be ingenious in an industry that’s in decline, according to paper industry analysts. Besides increasing efficiency and righting production levels to meet dropping demand, U.S. paper companies must continue to reinvent themselves by developing new products, entering new markets or selling energy generated from biomass at their pulp mills.
Verso is adjusting its production levels and is also looking to sell more of its excess electricity. And instead of being beholden to commodity-driven paper markets, the company is developing niche paper products that are less susceptible to market swings, according to Verso spokesperson Sondra Dowdell. “To the degree that we move away from commodity-driven markets, we can improve our margin,” she says.
No turning back
Once it started the process of going public, Verso couldn’t exactly stop, even while ominous signs pointed to a coming recession. “We were well under way,” Dowdell says. “We pretty much had raised all our funds right when the downturn was recognized. The train was already going down the track, and we got in under the wire.”
Private-equity firm Apollo Management bought International Paper’s coated paper division for $1.4 billion in 2006, renaming it Verso, and Cerberus Capital Management bought the Rumford mill, now NewPage, from MeadWestvaco Corp. in 2005 as part of a $2.3 billion deal.
Though Verso’s IPO timing was painful, at the end of the day the IPO accomplished the goal of raising capital, which was used to pay down some of the company’s debt. “If you are a public shareholder, it has been a very painful investment, but for the private equity ones, to monetize the company, it has been good for them,” Mason, who works for Equity Research Associates in British Columbia, points out.
Verso’s lackluster IPO was followed by an even worse year. In a downturn that has been challenging for so many sectors, paper companies have been particularly hard hit. In the first five months of 2009, global production of paper fell by 37% and demand slumped by a third, according to Brian McClay, a paper industry analyst in Montreal. “I don’t think any analyst saw this debacle coming,” McClay says. “And a lot of the demand is gone for good.”
As for the possibility of NewPage going public, spokesperson Tony Lyons says, “That IPO still sits out there, and we continue to assess the state of the economy and the market to decide if and when we were to do that.” But after the first filing last year, the company bought Stora Enso North America, which doubled NewPage’s size, reducing its need for a capital infusion, Lyons says.
Although the paper market rises and ebbs cyclically, the last few years have been especially trying. The Internet is turning our world into a high-speed digital planet where paper is often just an afterthought. But the Internet alone could not have brought about such upheaval in the industry.
“The markets weren’t bad before the recession,” McClay says. “They weren’t especially slipping before the recession. It hasn’t been a great business, but not down, and prices were moving up into this year because [manufacturers] were taking down capacity.”
The recession has taken its toll on advertisers. In recent months, magazines and catalogs — the major consumers of Verso’s coated, high-grade paper — have been faltering. Plus, everyone seems to be scaling back. Previously, a corporation printing its year-end report might have used glossy paper for every page, but now, as Mason puts it, “people are using fancy paper for just the first 20 pages.”
Mason adds, “You have a combination of horrible demand, and despite themselves, despite them having a more consolidated market, there is no way [paper companies] could hold the prices at the levels they were at. You are getting a hit on volume and price levels.”
Dowdell says in the 23 years she’s worked in the industry, she has “not seen it this bad. [It] has taken its toll on communities where paper and pulp is important.”
Pulp and paper communities
Verso employs more than 1,600 people in Maine at its mills in Bucksport and Jay. In March, it temporarily laid off 756 workers from its Bucksport mill, but rehired all of them two weeks later, according to the Bangor Daily News. Dowdell says the company is strategically taking downtime at its four mills (the other two are in Minnesota and Michigan), and idling certain machinery so that no one is without work for long. “We had some downtime due to lack of orders, which we take on various machines and not for long times to minimize the economic impact on communities and families,” she says.
Verso’s mill in Jay is the largest employer in the region, and hires a good percentage of its 4,985 residents, according to Town Manager Ruth Marden. Marden says Verso pays 56% of Jay’s taxes, and that “there’s a ripple effect to them being there. People who work there eat and shop locally.”
Both she and Carlo Puiia, the town manager of Rumford where NewPage is responsible for 60% of the town’s tax rolls, have been nervously watching the mills over the last year. But they both say that these days they feel slightly more relieved.
Puiia says he met with NewPage officials recently, and was told they’re confident the economy is improving. So far, he says the impact of the mill’s struggles has not been too onerous for the town. “They have had rolling layoffs, coordinated shutdowns,” Puiia says. “They’ve been keeping [employees] working periodically, so they’re not losing a huge amount of work force.”
Going forward
Since its formation in 2006, Verso has invested $151 million in its two mills in Maine, mainly to enhance production lines to create new products and to nimbly switch from one paper grade to another.
Instead of producing only high-end, coated paper, the company is seeking new market opportunities. Niche products, as Dowdell calls them, will be less vulnerable to the sways that control common paper products. “Versatility will help us in good times, but if this [economic downturn] happens again, we believe this is one of the strategic things we can do to weather this storm and the next one,” Dowdell says.
At the end of June, Verso launched a new product called Clarity, a type of calendar paper that Dowdell says has a more consistent glossiness than its competitors and less variability during print runs. The company is also looking to make paper that weighs less, making it cheaper to mail.
At the same time, Verso is managing its paper output to control inventory. “Traditionally it was the norm to produce and store in warehouses, but that affects your balance sheet — it’s inventory we don’t want to have around,” Dowdell says. Now, when a customer orders something, Verso makes it, enhancing its supply-chain management, she says.
Working on new products and altering its strategy, the company looks forward to the economy recharging. “We believe if we properly manage our asset base, apply capital when it’s needed, and spend time on research and development, we’ll be ready to turn the corner in this economy and be ahead of our competition,” Dowdell says. “We feel like we’ll be well positioned.”
Rebecca Goldfine, a writer based in Dresden, can be reached at editorial@mainebiz.biz.
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