Verso's Duluth paper mill may get caught in crossfire of company's struggles

If the name of the paper company Verso shows up in any Minnesota newspaper, you can be sure the news won't be good.

Readers may remember Verso as the owner of a paper mill in Sartell that had a deadly explosion in 2012. Before that, there were ­layoffs.

After the explosion and fire, Verso closed the Sartell mill for good, eliminating the last 250 or so jobs and ending an operation with roots going back to 1907.

Last week there was news in Duluth that the big Verso paper mill there, with about 300 employees, might be sold. It's a productive mill that has already changed hands a few times since it was built in the 1980s, but the paper industry in Minnesota has been increasingly challenging.

What's interesting is that the Duluth mill has only been part of Verso since January, when the company completed its acquisition of a competitor called NewPage Holdings.

Verso was trying to respond to the continuing decline in the market for coated paper used for magazines and catalogs, off an additional 4.7 percent in the first half of this year, according to an industry research firm Verso quoted in August. Verso's idea was to consolidate operations with another big industry player. It planned to eliminate a lot of cost, at least $175 million per year.

Not even a year into the deal, Tennessee-based Verso turned out to have been far too optimistic. The firm has "begun evaluating potential alternatives for the restructuring of our balance sheet," as a result of "cash flow and liquidity concerns."

For the first nine months of the current fiscal year, the company had an operating loss, meaning it lost money before expenses like interest were deducted, and operations consumed nearly $300 million in cash.

Papermaking is about as mature as an industry gets, but Verso is an upstart, not a traditional paper supplier. It's hard to imagine a traditional industrial company in any industry describing its business in filings at the Securities and Exchange Commission the way Verso just did, beginning at the very top:

"Within our organization, Verso Corporation, formerly named Verso Paper Corp., is the ultimate parent entity and the sole member of Verso Paper Finance Holdings One LLC, which is the sole member of Verso Paper Finance Holdings LLC, which is the sole member of Verso Paper Holdings LLC."

Got that? Verso Corp. owns a company called Verso, which owns a company called Verso, which owns yet another company called Verso. And that one may own some paper milling assets.

That first sentence makes a couple of things obvious. One, a half-hour wasn't nearly enough time to set aside to read this company's latest quarterly filing. And two, Verso is less a normal operating business than a deal, a creation of some financial managers.

Apollo created Verso in 2006 to acquire the coated paper business of International Paper. Verso has been a consistent financial performer since then, in that it routinely loses money.

The company Verso acquired just after the first of this year, NewPage, was also a big idea of a private equity manager. NewPage's private equity sponsor was Cerberus Capital Management, another big firm with Midtown Manhattan offices not quite a 15-minute walk from Apollo's.

Cerberus created NewPage to buy a paper business from MeadWestvaco Corp. in 2005. It later acquired the North American paper operations of the Finnish company Stora Enso, the deal that gave the company the paper mill in Duluth.

Apollo managed to take its paper company public before the financial storm hit in the fall of 2008 and all further flights into the public markets were canceled.

Cerberus also tried for a long time to get its paper company onto the public market, but it finally pulled its proposed offering. About a year later, in 2011, NewPage filed for bankruptcy protection.

This transaction actually took place in 2007, when Verso took out an additional $250 million loan. It was before the financial crisis, when borrowing that kind of unsecured money from financial institutions was still possible.

In its documents for the subsequent public stock offering in 2008, one of the main uses for the money to be raised from the public shareholders was paying back much of that $250 ­million loan.

What's unusual is that the $250 million loan wasn't taken out to buy anything productive, like new equipment. The loan proceeds went to the company owners as a distribution, a kind of a dividend. That's how Apollo got almost all of its money out of Verso.

It's a little like a weekend gambler going to the casino with $100 to play blackjack, winning right away and putting the $100 back in the ­wallet. Every additional hand for the rest of the night is really on the house.

That distribution alone doesn't make the Apollo managers the bad guys. It's a reasonable objective in a private-equity deal to minimize the amount of capital put at risk. Yet it does show just who actually had a lot to lose in Verso.