Coated paper maker Verso Paper Corp (VRS.N) said it would buy privately held NewPage Holdings Inc for about $900 million in cash and bonds to form a more cost-efficient company that can cope with increasing pressure from digital media.
Verso's shares jumped more than 300 percent, valuing the company as much as $146 million.
Demand for coated paper from magazines and catalogues has been declining as lower readership and advertising in print media force publishing and media groups to move online.
"It's sort of like two very weak companies holding each other up," Vertical Research Partners analyst Chip Dillon said.
Printing and specialty papers maker NewPage, which emerged from Chapter 11 bankruptcy in December 2012, had said last month it would delay a planned initial public offering.
The deal is expected to save at least $175 million in pretax costs in the first 18 months after the closing, likely in the second half of the year, the companies said.
"If you are a bigger company, it is easier to cut costs and cut capacity," Dillon said.
The combined company will have annual sales of about $4.5 billion and 11 manufacturing plants in six U.S. states.
Verso's sales fell 14 percent to $1.47 billion in 2012.
"Basically the companies are buying more time in the hope that there is a natural level of demand for coated paper," Dillon said.
NewPage shareholders will receive $250 million in cash and $650 million in notes. Verso will also take on $500 million in NewPage debt, Verso said on Monday.
NewPage shareholders will also receive a roughly 20 percent stake in Verso. The implied equity value even with Monday's run up in share value is less than $30 million.
"Essentially the deal is all debt, there is no real equity involved here," Dillon said.
Verso's shares were up about 170 percent at $1.77 on the New York Stock Exchange at 10:45 a.m. ET.
A short squeeze could partly be the reason for the jump in Verso shares on Monday, Dillon said.
Short-sellers borrow shares and sell them, seeking to profit by returning them after buying them back at a lower price. A short squeeze occurs when the share price rises instead, forcing the borrowers to try to buy them back at a higher price, thus pushing the share price even higher.
A NewPage director will join Verso's board, the companies said.
Evercore, Barclays and Credit Suisse were Verso's advisers. Kirkland & Ellis LLP, Morgan, Lewis & Bockius LLP, and Paul, Weiss, Rifkind, Wharton & Garrison LLP were its legal advisers. Palisades Capital also acted as a financial adviser to Verso.
NewPage's financial adviser was Goldman Sachs & Co and its legal adviser was Sullivan & Cromwell LLP.
(Reporting by Swetha Gopinath and Garima Goel in Bangalore; Editing by Don Sebastian)