Paper Giants to Merge

If the proposed merger between paper company Stora Enso and private equity firm Cerberus Capital, which owns NewPage Corp., is approved, NewPage would emerge as the top producer of coated freesheet paper in North America.

Stora Enso announced on Sept. 21 that plans to sell its North American division for approximately $2.1 billion to NewPage Holding, which owns Miamisburg, OH-based NewPage Corp. According to the proposed deal, Stora Enso will receive about $1.5 billion in cash, a $200 million note, and a 19.9% equity interest in the new company. The transaction, subject to regulatory approvals, is expected to close during the first quarter of 2008.

In 2006, Stora Enso North America recorded $2.0 billion in sales. The merger is expected to generate about $265 million in annualized cost savings, officials said. According to proposed deal, the new company will retain the NewPage name and remain based in Miamisburg, OH. The mills being sold were once part of Consolidated Papers, which Stora Enso acquired in 2000 for $4.8 billion. Six of the mills are in Wisconsin, one is in Duluth, MN, the other in Port Hawkesbury, Nova Scotia, Canada. NewPage will assume about $450 million in debt in the deal.

What does the deal mean to the catalog industry? “There will be very little impact on the paper market for a while,” says John Maine, vice president of forest industry research group RISI. “The merger will not be final until sometime during the first half of 2008, and must go through regulatory approvals. At that time, NewPage will emerge as the number-one producer of coated freesheet in North America. Its market share will rise to 40% for coated freesheet, placing them far ahead of Sappi at 22%.”

Certainly the merger will create a lot of synergies, reducing costs in the process, Maine adds. “Anything that reduces costs in the industry should be good for the end user. However, the market share will also give NewPage more pricing power as well as more control over supply management to support pricing initiatives. On balance, I don’t think that we will really see prices much higher or lower than they otherwise would have been. The synergies will all go to restore some profitability to the producer, and help them compete with the increasing presence of offshore competition, with the latest threat coming from Japan.”

With more than 4,300 employees, NewPage Corp. operates integrated pulp and paper manufacturing mills located in Escanaba, MI; Luke, MD; Rumford, ME; and Wickliffe, KY; and a converting and distribution center in Chillicothe, OH. The mills have a combined annual capacity of approximately 2.2 million tons of coated paper.

Michael Wade, vice president of business development at Wade Paper Corp., says the deal has been rumored for some time. “If it closes in the first quarter of 2008 as planned, it will mean that NewPage will have over 35%
of the North American coated paper capacity,” he says. “That is more than twice that of their closest competitor. Clearly, they are taking a leadership
position and I wouldn’t be surprised to see more deals follow. Overall, the top five producers will now control over 75% of the North American capacity.”

David Goldschmidt, vice president of marketing, catalog division for paper brokerage Strategic Paper Group, says the merger “takes one more major North American player out of the marketplace, which is not good for the end user. Less options. They will have to rationalize the grade line, of course, as there are a lot of overlapping grades.”

By rationalizing the paper grade line, Goldschmidt means combining grades, determining which grades to maintain. For instance, Goldschmidt says, Stora Enso and NewPage have five grade #4s now– Capri, Dependoweb, Polaris,
Escanaba, and NovaPress; and they have three grade #3 sheets–Focus, Orion, and Vision. “So rationalizing the line means, ‘do you keep Orion and get rid of Focus or vice versa.’ If the grades are basically the same in spec, you probably can phase out the one with lower name recognition or reputation.”

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