Verso Paper takes advantage of rising prices

By Sara Lepro, May 12, 20-8
Associated Press
NEW YORK

Coated paper company Verso Paper Corp. is hoping the good old fashioned principle of supply and demand will drive interest in its initial public offering this week.

Rising input costs, higher energy prices and the stronger Canadian dollar have sparked plant closures, reducing North American capacity by about 12 percent, according to Verso's prospectus with the Securities and Exchange Commission. The majority of the closures have been Canadian facilities, which have been at a cost disadvantage to U.S.-based mills, due to the appreciation of the Canadian dollar. Foreign imports to the U.S. also have been curbed because of unfavorable exchange rates and rising freight costs.

"Coated paper is one of the most attractive areas of the paper industry right now," said Matt Therian, an analyst at Renaissance Capital's IPOHome.com. "Demand in North America is outstripping supply and the remaining mills gain pricing power from that."

Verso's weighted average paper prices rose to $840 per ton in the fourth quarter of 2007 from $797 per ton in the second quarter of that year. Verso expects paper prices to continue to increase through 2008.

Based on 2007 sales, the size of the global coated paper industry is estimated to be about $49 billion, or 54 million tons, including $12 billion, or 13 million tons, in North America, according to the SEC filings.

However, not all analysts are convinced that the rising price of paper will be a big enough selling point for investors. The company has said North American consumption of coated paper has grown at a modest 2 percent compound annual growth rate since 2001.

"It seems that Verso right now has implemented the bulk of its expected price increases in a cyclical market segment where capacity shortage won't last forever, and whose growth has been less than the overall economy's in the last seven years," wrote Francis Gaskins, president of IPODesktop.com, in a research note.

Gaskins also said that the company's operating income was more than offset by interest payments in the most recent quarter, since Verso carries a considerable amount of leverage.

On the other hand, Renaissance Capital's Therian noted that Verso is led by an experienced management team. Verso President and Chief Executive Michael A. Jackson, who joined the company in November 2006, previously served as a senior vice president at forest products company Weyerhaeuser Co.

"They know what they are doing in the paper industry," Therian said.

The Memphis, Tenn.-based company expects its IPO to total nearly 18.8 million shares and price between $16 and $18 apiece. Credit Suisse and Citi are managing the deal.

Based on the expected price range, Verso's market capitalization will range from $908.7 million to $1.02 billion. Assuming an offering price of $17 per share, Verso expects to raise about $295.8 million from the IPO after fees and expenses.

The company plans to use a majority of the proceeds to repay debt, including a loan that was used to pay dividends.

Verso was formed in August 2006 by affiliates of private equity firm Apollo Global Management LLC to buy out the coated and supercalendered paper division of International Paper Co. Apollo will retain a 67 percent interest in the company following the IPO.

The company's primary products are used in catalogs, magazines, annual reports, brochures, and retail inserts, and its customers include magazine publisher Conde Nast Publications, catalog producer Sears Holdings Corp. and commercial printer RR Donnelley & Sons Co.

Verso operates 11 paper machines at four mills, which have a combined annual production capacity of 1.7 million tons of coated paper. Its main competitors include NewPage Corp., which announced plans for an IPO last week, Bowater Inc. and Sappi Ltd.

For the three months ended March 31, the company reported a loss of $3.1 million on sales of $453.9 million. This compares with a loss of $35.4 million on revenue of $359.8 million in the prior-year quarter.