Poking Holes in Verso Paper Offer

Analysts Complain About Price, Expect Investor Resistance
By Lynn Cowan, Wall Street Journal
May 12, 2008; Page C5

After a few weeks of delicate improvements in the IPO market, paper company Verso Paper Corp. will try this week to lob a deal at investors that could land with a thud.

The Memphis, Tenn., company, which was formed in August 2006 by private-equity firm Apollo Management LP from two paper divisions of International Paper Co., is trying to launch an initial public offering of stock with a price tag that is too expensive in an industry that hasn't generated much excitement, according to analysts.

Add in the fact that most of the proceeds raised will be used to pay back debt used to finance a dividend that Apollo bestowed on itself more than a year ago, and Verso could face some resistance from investors.

The company, which hopes to list on the New York Stock Exchange under the symbol VRS, is aiming to sell 18.75 million shares at a price of $16 to $18, or as much as $337.50 million. With its focus on coated papers, which are used in everything from magazines to brochures, Verso has been able to raise prices since mid-2007, thanks to competitors' mill closures reducing supply.

Forest-products-data tracker Resource Information Systems Inc. is forecasting average prices will rise 17% from 2007 to 2008 and 5% in 2009.

All of which sounds promising, but Morningstar Inc. paper and forest-products analyst Daniel Rohr said rising expenses for energy, raw materials and freight may mute the effect of better pricing dynamics for paper manufacturers. In addition, weaker consumer spending and the increase of online media could impede the ability of paper makers to impose higher prices on magazine publishers and advertisers.

Mr. Rohr pegged the deal's fair value at closer to $12 a share.

Francis Gaskins, president of research site IPODesktop.com, said he isn't wowed by Verso's financial statements, which show, for 2007, net sales that rose 1% and a net loss of $111.5 million compared with net income of $8.1 million in 2006.

The company's results improved in this year's first quarter, with net sales rising 26% as both sales volumes and prices rose, and its net loss narrowed to $3.1 million from a loss of $35.4 million a year earlier. In both the full-year and quarterly results, interest expense erased all operating income.

"Their interest payments are too high, and they are in an industry that has grown slower than the broader economy since 2001. In 2008 there are still some expected price increases, but the shortage in industry capacity won't last," said Mr. Gaskins. "Demand and supply will eventually even out."

If Verso's deal is scrapped or flops, it isn't the only company that will be affected: Last week, NewPage Group Inc., the largest coated-paper manufacturer in North America, owned by private-equity firm Cerberus Capital Management LP, reactivated its IPO plans after shelving them in 2006 because of market conditions. A poor showing by Verso won't bode well for NewPage completing its deal.