Pick up a nice magazine or catalog and it’s likely the glossy pages were made by a Memphis company called Verso Paper Corp. But Verso has run up losses in three years that total $350 million.

Americans touch ever less paper, a trend that has sent Verso and its best customers reeling from an explosion of digital media.

So how does the Memphis company survive?

Verso’s new boss is adamant. The company, with annual sales that surpass $1 billion, will hang on. How?

Acquire an ailing rival, maybe more than one, move the offices to Memphis and survive by consolidating.

“We have to try to get the cost reductions we can’t get on our own,” explained David J. Paterson, the new president and chief executive officer of Verso, which employs about 2,200 people in Michigan and in Jay and Bucksport, Maine, mills and another 100 in the Memphis head office.

A long-time Georgia-Pacific Corp. executive who commutes from Atlanta, Paterson, 52, took the top post at Verso in May. He joined just before Verso disclosed a proposal to buy NewPage Corp., a 7,000-employee rival based near Dayton, Ohio.

A conglomeration of firms including Wisconsin’s old Consolidated Papers Inc., NewPage is currently operating under U.S. bankruptcy code Chapter 11. The law allows temporary breathing room — payment of debts is put on hold — while the company drafts a plan to come out of bankruptcy and pay down bills at least part way.

Although it’s the only suitor for the Ohio company, Verso’s offer drew scoffs from paper industry analysts. “It’s like a Hail Mary pass” between two winded football players, said Adam Gefvert, a New York investor in Verso. Even NewPage shrugged it off.

Paterson  isn’t ready to call a deal dead. Mergers offer a way to get hold of the acquired company’s customers and run more volume through the survivor’s mills. It’s the same strategy Delta Air Lines employed after it acquired Northwest Airlines — itself a conglomeration of older carriers named Northwest Orient, North Central, Southern and Hughes Airwest. Once in charge, Delta scaled back flights from the Memphis hub built up by Northwest and instead routed travelers through Delta’s base in Atlanta.

While soaring oil prices touched off the recent merger and bankruptcy spree in airlines, paper makers were hit by something else — first overcapacity, then declining demand for their product in the face of digital publishing.

Unique visitors to online news sites rose 17 percent last year, while newspaper circulation nationwide fell 4 percent, and circulation of the six largest magazines slipped 0.5 percent after an 8.9 percent drop the year before, says a 2012 news media analysis by Pew Research Center, a think tank in Washington.

“During my entire career it’s been consolidation in this industry,” Paterson said of the paper business. “I’ve been bought and sold five times. The market is shrinking. You can get opinions but not a clear vision of what that decline will look like. You’re in a structural decline environment in North America.”

International Paper Co., a 70,000-employee manufacturer based in Memphis, figured the decline was coming. In 2006, IP spun off Verso to Apollo Management Inc., a New York buyout firm. IP refocused mainly on container board and packaging, which are used to cover everything from refrigerators to cat food, and looked overseas, investing in production capacity in China, India and Russia.

While Verso was being spun off, Paterson was busy becoming a restructuring expert. In 2004, he oversaw the sale of Georgia-Pacific’s 3,400-employee building products distribution business to Cerberus Capital Management, a New York hedge fund that also controls NewPage.

Two years later, he joined South Carolina-based Bowater Inc. as CEO and presided over its $1.7 billion merger in 2007 into Montreal’s Abitibi-Consolidated Inc. The deal formed North America’s largest newsprint maker with the goal of reducing overcapacity in a business strained by thin profits. It also coincided with the Wall Street crash that set off the recession in late 2007.

Saddled with debts and falling demand, AbitibiBowater Inc. refinanced loans and slashed newsprint manufacturing capacity by one million tons, leading the province of Newfoundland to claim control of Abitibi forest lands and hydroelectric systems, and charge the company violated the North American Free Trade Agreement. The company soon filed for Chapter 11 bankruptcy.

Late in 2010, the company emerged from bankruptcy. Paterson then stepped down as CEO, saying it was time for new leadership. “You don’t make a lot of friends inside a company” engaged in a wrenching bankruptcy, he said. He took one year off, until Verso and Apollo recruited him to head the Memphis paper maker.

“We’re in a trough,” Paterson said of the paper business. “Is the trough the new reality, or is there still an upside to this?”

Not sure an upside will appear any time soon, Verso this month decided to close rather than rewire its ruined mill at Sartell, Minn., discharging more than 260 workers. Paterson said reducing capacity makes sense.

The alternative was replacing the electronic controls damaged by the fatal Memorial Day fire next door in the Verso warehouse. Rewiring the plant would have cost nearly as much as building a new mill, Paterson said. He said he’s not averse to spending capital but prefers to develop new products, such as special paper used in some surgical procedures.

Despite its red ink, the company generates about $70 million per year in capital, of which the bulk goes to maintain the mills. About $20 million is allocated for machinery able to make new products.

“We’ve been dealing with and anticipating the electronic conversion (in media) for a number of years,” Paterson said, although he notes quality magazine paper will remain the company’s mainstay.

Hanging on, though, is getting tougher. Standard & Poor’s Rating Services, a business in New York that gauges whether companies can readily repay debts, looked at Verso’s capabilities and this week gave the paper maker a negative outlook, reflected in this prediction:

“Only $190 million in cash will emerge next year after paying interest and taxes, down 15 percent from S&P’s earlier forecast. That compares with an estimated $140 million in cash this year, down from $150 million the prior year.

“Our ratings incorporate the company’s limited product diversity, substitution risks due to changing customer preferences for greater electronic content, and vulnerability to fluctuations in input costs and selling prices,” says S&P’s report, which assigns Verso a lowly B grade.

But the new CEO says the company is not about to go under.

“I think we’re managing the company fairly tightly,” Paterson said. “We’re not burning cash.”

The next step: Tap Apollo Management’s deep pockets and use the money to take control of NewPage.

“Our proposal is for Verso to acquire NewPage in the bankruptcy process,” Paterson said. “We can survive.”

©2012 The Commercial Appeal (Memphis, Tenn.)

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