Verso Paper Corp. has not ruled out a merger with bankrupt Ohio rival NewPage Corp., the company’s top executive said Thursday.

Key lenders at NewPage recently rebuffed merger talks proposed by the investor backing Verso, a struggling paper maker which posted a $20.6 million quarterly loss on Thursday.

A deal might still surface as NewPage proceeds through its bankruptcy reorganization, said David J. Paterson, Verso president and chief executive officer.

Uniting 7,000-employee NewPage and 2,500-employee Verso could give the merged businesses more financial stability as digital publishing drives down demand for quality magazine paper, analysts say.

With a merger, Verso could spread over a wider base the $1 billion in debt left over from its 2006 leveraged buyout by Apollo Management Inc., a New York investment firm. Leverage in this case means Verso itself borrowed the money used to pay off the previous owner.

Some $3 billion in debts burden NewPage, which filed for bankruptcy in September. Much of the debt was accumulated during a 2005 leveraged buyout. Mead Paper Corp. sold the business to New York hedge fund Cerberus Capital Management.

For a deal, merger talks would have to take place among Apollo and Cerberus executives along with a class of NewPage creditors known as the first lienholders. They loaned the paper business money secured by NewPage assets such as machinery. For now, details are scarce about just how a merger would go forward.

“We’re all waiting to see what happens in the court process,” Paterson said on Thursday, noting that “what happens in the Chapter 11 court process (can serve) as a trigger point about the next discussion about a combination.”

In Chapter 11 reorganizations, bondholders and large creditors typically take control of the bankrupt company and form a plan to stay in business, raise cash and pay off some debts. Apollo is an unsecured creditor. Before the bankruptcy, Apollo bought NewPage unsecured bonds, which are a kind of loan.

The possibility of a merger apparently rallied investors on Thursday. Verso’s stock rose 8 cents to close at $1.42 per share, a gain of 6 percent from Wednesday’s close, while the wider market measured by the Dow Jones industrial average lost value.

On Thursday morning, Paterson commented during a telephone conference call with paper industry analysts. Questions by the Wall Street analysts touched briefly on NewPage and focused largely on Verso’s improving financial performance. The latest quarter pushed total losses at Verso, a 2006 spin off by Memphis-based International Paper Co., to about $335 million over the last two years.

Paterson said the company is generating ample cash and looking forward to stable production volumes this year following the recent decision to close its fire-damaged mill at Sartell, Minn. Three mills remain open in Michigan and in Jay and Bucksport, Maine.

Although Verso lost money in the second quarter, which ended June 30, it lost less than in the second quarter last year. Losses totaled $20.6 million, or 39 cents per share, including about $5 million attributable to the Sartell fire. Sales revenue totaled $365.2 million.

A year ago, Verso lost $24.3 million, or 46 cents per share, on revenue of $398.7 million.

“This (quarter’s loss) was primarily the result of a drop-off in advertising spending and slowdowns in the commercial print area which are impacted by the sluggish GDP growth,” Paterson said.

©2012 The Commercial Appeal (Memphis, Tenn.)

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