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.)
Distributed by MCT Information Services
I hope we look into the near future and find ways to work in a post papermill era. The writing is on the wall. We have been warned. Good jobs with good wages and benefits are hard to come by but such is life in the 21st century. We will survive.
Though I agree that we need to look to the future I also believe we must change the current economic system which has failed the fast majority of American citizens. Without such I change I’m not so sure we will survive. At least not in any economically recognizable way. Our quality of life is going to tank if it’s left to the GOP. How would I change it you ask? I’m not an economist but I think a hybrid of our current system only with much more regulation so that unbridled greed is not realized at the expense of the majority. Vote democrat.
watchdogME, I appreciate that you didn’t take this opportunity to simply bash Bucksport as you have done so many times in the past. I actually agree with your comments on the problem. And I wish that the answer was as simple as voting for one political party. Unfortunately there is enough political corruption in all of the parties to go around. I support Susan Collins and I support Mike Michaud. Lastly, Verso Bucksport is the sole supplier of paper for the Splenda packets. Simply choosing Splenda over other sweeteners is supporting Bucksport employees. And you can even buy them at WalMart.
subtract the fact that splenda is poison… then sure.
Yes I voted similarly until I realized that the GOP had to be defeated because when it came down to all the important issues for the average American Senator Collins voted along party lines. I also agree that there is enough corruption to go around however in aggregate I believe this election will be a mandate on our economic future. So I can overlook the small stuff and I will vote for the party that traditionally represents the interests of the many, not the few.
You know I just read a comment on Roger Raymond going to Hampden and the author quoted all the nice things Mr. Raymond had done for Bucksport, including lowering the mil rate. Unfortunately this person forgot to mention how high reassessments have been in Bucksport over the last 15 years. The net result is that home owners are paying much more in property tax, twice as much in many cases, as they did a mere 10 years ago. Bucksport is going to be in deep doo doo when Verso closes that mill and they lose the that property tax. Oh my. It’s going to happen and it sounds as though this Paterson guy is just the one to do it.
more central bankers printing more money to pay for the debt we have incurred from spending spending spending. good plan.
Not saying mitt romney is the answer…. hell no. We cannot solve our problems with more collectivist thinking.
Print paper = buggy whips and wagon wheels.
Paper makers must evolve or die. A consolidated pile of crap is still a pile of crap.
This CEO is nothing but a check collecting stuffed suit figurehead….no new vision. #ApolloFail
Paterson is the same as candidate Romney before Romney started running for office. Lay off rather than invest and then resell the company or get out before the people hang you. Notice how the story starts out by saying 3 year losses that total $350,000,000? Then they say profits are down from $150,000,000 to $140,000,000? Most folks don’t understand that the accounting, or more accurately the way the numbers are reported, is skewed from the way we look at our household accounting. What he means by losses totalin $350,000,000 over 3 years actually means the profit they predicted fell short by this amount. It does not mean that they actually operated in the red by $350,000,000. It is just another way accountants, and future politicians, word things so they seem to mean one thing when actually they mean something quite different. In this case Paterson is trying to make it look as though the company is in dire straights and losing big money. The truth is, they just didn’t make as much money as they wanted to. So this will give credibility to Mr. Paterson’s actions when he lay’s a bunch of people off, hires temp workers, and lowers wages. To me, this sort of accounting is outright lies meant only to facilitate the Romney style of company management.
You might want to read the article again. The $150M and $140M figures you cite are cash flow figures, not net profits. The $350M loss has nothing to do with projected earnings.
After paying interest and taxes and ???? The cash flow is $70,000,000 a week. I won’t argue the small stuff. The point is, that $350,000,000 is not red ink. It is unrealized profit that was predicted.
Anyone who works in the paper industry and has just read this article, cannot pretend to be surprised or caught off guard in the future when the mill closes. This industry is ending and what little of it will continue to exist (paper towels and TP), will move to China.
then we all need to change our thinking and buying habits…..buy made in America and made in Maine if we are to survive as a nation, bring products and jobs back to our country. Would you support the neighbor who you hate or hates you?
Sorry but that ship sailed long ago. Americans won’t tolerate the higher prices of products made here. Walmart is clear proof of that
Perhaps they would if they were not lied to by the politicians and CEO’s. Perhaps if people could make a living wage they would buy American over imported. American products, American quality, and living wages equals a healthy America. Trickle down economics didn’t work for Reagan, didn’t work for Bush/Cheney, and won’t work now.
Walmart is the reason that they wont Tolerate High Prices and it’s NOT their Low Prices, it’s their “Low Wages”!
When it becomes the Norm who can afford NOT to shop there!
Excavator, I don’t understand how changing our buying habits to made in America and Maine is going to help given the demand is just going away. I look at my family: my parents in their 70’s and 80’s buy lots of magazines, we in our 50’s buy few magazines and my kids in their 20’s don’t buy any and probably never will. It is all on-line now…
The demand for magazine paper is going away, but the valuable raw materials: hydropower, cogeneration, wind power and wood, are still here. It makes sense for the workers to take the responsibility to get educated and retrained and the businesses take the responsibility to develop new products which use these raw materials. The future is coming and we should seize it, not be blind-sided by it. Start now!
For what it is worth, if we all buy local, the Maine market for magazine paper is so small that it would support no mills and no jobs. Hopefully, the rest of the world won’t take your attitude and will still buy stuff made in Maine, like lobsters.
The demand for printed paper is still there!
It’s a “global” thing!
for once I agree with you bangorian. print will be obsolete by the end of this century.
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The Post Office and Print paper are obsolete, finished. They were good ideas a few hundred years ago but Electrons have killed both.
Paper mills don’t just make paper for news and magazine outfits or toilet paper rolls. Paper mills make paper used to imprint patterns on clothes, accessories, car dashboards and thousands of other products. “Paper” products are also used in the production of thousands of other products. Just because books, newspapers, and magazines go the way of the dinosaurs does not mean all or even most paper mills will go dark.