WASHINGTON Verso Paper Corp's plan to buy privately held rival NewPage Corp could well be approved by U.S. regulators, even though the new company would make more than half the coated paper used in magazines and catalogs.
If the $900 million deal goes through, the new, bigger Verso would have 54 percent of U.S. capacity to make coated paper and South Africa's Sappi Ltd, the new No. 2, would have about 25 percent, giving the top two companies in the business nearly 80 percent of market capacity, according to Hilco Valuation Services.
Coated paper is used for magazines and retailers' catalogs.
That would put the market squarely into the "highly concentrated" range, with a related strong grip on industry pricing, according to 2010 guidelines from the Justice Department and Federal Trade Commission, the two agencies that enforce U.S. antitrust law.
Of five antitrust experts surveyed by Reuters, three said the acquisition could be approved with divestitures, one said it faced an "uphill battle" and one said it could go either way.
"I see a huge risk here with the concentration levels that we see, but there's also some reasons here why the transaction could be approved," said Andre Barlow of the law firm Doyle, Barlow and Mazard PLLC.
Those reasons include competition from overseas in the coated paper market, and strategic asset sales that could bring Verso's post-merger market share down, at least a little.
A history of price-fixing in the industry will increase antitrust scrutiny, experts said.
"There was certainly a time in the past that companies would not even propose such a deal (with such high market shares). Times have changed," said Bert Foer, head of the American Antitrust Institute, a nonprofit think tank.
In the past, Foer said, if an industry sank below a certain number of large players, a deal would be presumed to violate antitrust law and should be stopped. Now, he said, the government is required by courts to show more that a merger would lead to higher prices - "almost to prove the future."
INDUSTRY IN DECLINE
Demand for the glossy paper has fallen as tablet computers and e-readers take a huge bite out of the traditional magazine industry and retailing is done more on websites and less via printed catalogs.
NewPage's sales fell 2 percent in 2013 to $3.1 billion, and it estimated in its 2013 annual report that the U.S. demand for printing and writing paper fell 8 percent between 2011 and 2013. It filed for bankruptcy in 2011, after suppliers began cutting off credit, leaving liquidity "severely constrained"; it emerged in 2012
Verso said in its 2013 annual report that net sales fell 14.4 percent in 2012 and 5.8 percent in 2013.
When the deal was announced in January, Verso's share price shot up from just 65 cents to as high as $5.50. It closed on Thursday at $3.48.
Memphis-based Verso has three paper mills - two in Maine and one in Michigan - with a total annual paper capacity of about 1.5 million tonnes. NewPage, headquartered in Miamisburg, Ohio, has eight mills in Kentucky, Maine, Maryland, Michigan and Minnesota.
Verso said in its 2013 annual report that it is highly leveraged with $1.2 billion in debt.
Jonathan Lewis, an antitrust expert with Baker Hostetler LLP, said that falling sales industry-wide and excess capacity means that the deal could be approved.
"If there's something for them to give up, a plant or a mill, then it's fixable," said Lewis.
Less optimistic was Seth Bloom, who served as general counsel of the Senate's antitrust subcommittee when the panel was headed by former U.S. Senator Herb Kohl, a Wisconsin Democrat.
"This merger has some serious problems given the market share that would emerge," said Bloom, who is now in private practice. "It's an uphill battle but it's not impossible."
The companies said in July that they still expect the deal to close in the second half of 2014.
Verso declined comment while NewPage did not return phone calls seeking comment.
(Reporting by Diane Bartz; Editing by Ros Krasny and Steve Orlofsky)