Verso Paper late yesterday said that it “has held discussions with certain holders of the 11.375% first-lien senior secured notes of NewPage in an effort to achieve a potential business combination involving Verso and NewPage.”
Verso’s proposed transaction would provide NewPage’s first-lien noteholders with $1.425 billion of value, or an 83% recovery based on allowed claims of about $1.717 billion, consisting of $1.075 billion of new Verso first-lien notes, $150 million of Verso common stock, and $200 million of cash ($100 million of which would be paid on the effective date).
In addition, Verso said, the proposed transaction would include “a to-be-determined amount of Verso common stock for the holders of NewPage’s second-lien notes, and a to-be-determined recovery for NewPage’s unsecured creditors.”
Verso added that it would make a $200 million cash equity investment in NewPage “to facilitate the transaction.”
Verso said the business combination would be “part of a consensual plan of reorganization in NewPage’s Chapter 11 bankruptcy proceedings.”
In a statement, however, NewPage rejected the proposal, saying it “posed significant downside risks to its stakeholders, employees, and business.” NewPage further said that it had “also been advised that the first lien note holder group did not support the proposal,” and added that the company “does not anticipate further discussions regarding this proposal.”
Verso, for its part, said it “has been disappointed with the lack of progress in advancing its discussions with the first-lien noteholders.”
Verso is controlled by Apollo Management. Apollo, along with Avenue Capital, is also reported to hold a significant portion – somewhere north of 50% – of NewPage’s second-lien notes. A group of second-lien noteholders has been active in NewPage’s bankruptcy, but the group has not disclosed its membership in court filings.
Meanwhile, debt backing both NewPage and Verso has been trading actively, with NewPage 11.375% first lien notes due 2014 at 72/73 this morning, versus levels in the mid-60s late last week, according to market sources and trade data. Verso 8.75% second lien notes due 2019 changed hands in a 48/50 context, versus levels around 40 last week, while 11.375% subordinated notes due 2016 are up about 10 points, trading at 55-57.5, trade data show. Verso 11.75% first-lien notes due 2019 are up about one point, at 102/103, sources note.
Verso stock, meanwhile, is up 50% in late-morning trading, at $1.75, on 9.3 times average volume.
The updated offer
In addition to its announcement, Verso on June 18 filed a Form 8-K with the SEC providing a more detailed overview of the proposed transaction. The company also provided a summary of an earlier offer, this one dated May 30, that it said it made to first-lien noteholders, for comparison purposes. The revised offer, which Verso said reflected NewPage’s updated earnings and cash balance, significantly lowered the potential recovery for NewPage’s first-lien lenders.
The documents show that under the earlier offer, first-lien noteholders would have seen a recovery valued at 103%, comprised of $1.314 billion of new Verso first-lien notes, $146 million in new common stock, and $300 million in cash ($200 million paid upon the plan’s effective date).
As for additional details of the current proposed transaction, Verso estimated the combined total enterprise value of the post-reorganization company at $3.3 billion, based on $550 million of EBITDA and an assumed trading multiple of 6x. Further, assuming post-reorganization net debt of $2.29 billion, Verso put the equity value at $1.01 billion.
According to the overview, first-lien holders would wind up with an 18.6% stake in the resulting company, which they would receive at a 20% discount to plan value. The June 18 overview shows that second-lien holders would receive 9% of the new common equity in the deal.
The plan’s $200 million rights offering would be backstopped by NewPage’s second-lien noteholders and Verso shareholders, and according to the overview would be at a 33.3% discount to plan value. Rights plan participants would wind up with a post-transaction stake of 29.7%.
Verso, meanwhile, would hold a 42.8% stake in the resulting company.
Verso also said that it identified $125-150 million of “cost synergies” in the deal, comprised of savings in distribution expense of $7-10 million; in direct costs of $46-61 million; in indirect costs of $2-3 million; in SG&A/overhead of $20-26 million; and “operations optimization” of $50 million.
The company’s June 18 overview did not provide any additional information with respect to a potential recovery for unsecured creditors. Unsecured creditors have, to date, been a litigious bone of contention in NewPage’s bankruptcy proceeding. As reported, first-lien holders contend that unsecured creditors are out of the money, while the unsecured-creditors’ committee is seeking court permission to file a fraudulent-conveyance lawsuit that, if successful, would avoid liens held by secured creditors and upend the priority of NewPage creditors. For its part, the company has been looking, so far unsuccessfully, for a formula to settle the dispute.
As reported, NewPage just won an extension of its exclusive right to file a reorganization plan in its Chapter 11 case through Sept. 4. In mid-June, the company told the court that it would be filing a proposed reorganization plan in a “relatively short time.” Given the opposition to the company extending its exclusive hold over the plan filing process from both unsecured creditors and first-lien lenders, however, it is unclear how much support any proposal from the company would have. – Alan Zimmerman/Jon Hemingway