Verso + NewPage = Capacity Rationalization = Prices going up

On January 6th, the long-rumored combination of Verso Paper and NewPage Holdings announced that Verso would acquire NewPage. The transaction is expected to close in the second half of 2014. In the press release, pre-tax cost savings of $175 million in the first 18 months after close was cited as how the transaction is going to create value. Given the combined companies spent about $200 million in selling, general, and administrative costs in 2012 (last reported full year), it’s not all coming from SG&A savings. I’m sure there are some purchasing and logistics synergies they can find, but to get that big cost savings number, my guess is they’re going to shut down a mill or two.

So, the trend continues. In a mature (actually declining) industry, capacity rationalization is a must. We’ve seen this occur over the last few years as private equity has gotten involved in the paper industry. Long gone are the days of paper mills running whether there is demand or not. We’ve seen mills close left and right over the last few years. Those of us that rely on paper in our supply chain will feel the impact of capacity rationalization via longer lead times, higher prices, and less choice in vendors.

Expect this scenario to continue to play out in the paper industry. Eventually, it will hit laminate suppliers and label converters directly, with capacity rationalization being the driver of mergers in our industry.

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