Restructuring Verso Paper Corp. - ?· Restructuring Verso Paper Corp. 5 2. Balance Sheet Restructuring…

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<ul><li><p> 1 </p><p>Jordan Flowers Martin M. Saravia Laconi Thomas Silva Elizabeth Adams Boris Vaisman </p><p>As prepared for: Prof. Laura Resnikoff </p><p>Turnaround Management Columbia Business School </p><p>Restructuring Verso Paper Corp. May 3, 2012 </p></li><li><p>Restructuring Verso Paper Corp. </p><p> 2 </p><p>Table of Contents </p><p>EXECUTIVE SUMMARY .......................................................................................................................4 </p><p>INDUSTRY ..........................................................................................................................................6 </p><p>MARKET TRENDS .......................................................................................................................................... 6 </p><p>COMPETITIVE LANDSCAPE ............................................................................................................................... 8 </p><p>COMPANY ....................................................................................................................................... 11 </p><p>HISTORY &amp; BUSINESS DESCRIPTION ................................................................................................................ 11 </p><p>MANUFACTURING PROCESS &amp; VALUE CHAIN ................................................................................................... 13 </p><p>PRODUCTS ................................................................................................................................................. 14 </p><p>MANAGEMENT TEAM .................................................................................................................................. 15 </p><p>SHAREHOLDER PROFILE ................................................................................................................................ 16 </p><p>RECENT FINANCIAL PERFORMANCE ................................................................................................................ 17 </p><p>SEGMENT OVERVIEW ................................................................................................................................... 19 </p><p>CURRENT CAPITAL STRUCTURE ...................................................................................................................... 21 </p><p>VALUATION ..................................................................................................................................... 26 </p><p>DISCOUNTED CASH FLOW ANALYSIS ............................................................................................................... 26 </p><p>Weighted Average Cost of Capital (WACC) ........................................................................................ 29 </p><p>Sensitivity Analysis ............................................................................................................................. 30 </p><p>COMPARABLE COMPANIES ANALYSIS ............................................................................................................. 30 </p><p>ACQUISITION MULTIPLES ANALYSIS ................................................................................................................ 31 </p><p>HISTORICAL TRADING PRICES ........................................................................................................................ 32 </p><p>LIQUIDATION ANALYSIS ................................................................................................................................ 33 </p><p>PLAN OF REORGANIZATION (POR) ................................................................................................. 33 </p></li><li><p>Restructuring Verso Paper Corp. </p><p> 3 </p><p>OPERATIONAL RESTRUCTURING ..................................................................................................................... 33 </p><p>BALANCE SHEET RESTRUCTURING .................................................................................................................. 36 </p><p>DISTRIBUTION OF VALUE &amp; RECOVERY ANALYSIS .............................................................................................. 39 </p><p>APPENDIX ........................................................................................................................................ 43 </p></li><li><p>Restructuring Verso Paper Corp. </p><p> 4 </p><p>EXECUTIVE SUMMARY </p><p>Since its spinout from International Paper in 2006 and subsequent IPO in 2008, Verso Paper </p><p>Corp. (Verso or the Company) has encountered a litany of industrial, financial, and </p><p>operational challenges. The paper manufacturing industryand particularly the coated paper </p><p>industryhas faced strong secular headwinds in the form of declining demand due to the </p><p>increased adoption of digital media. The Company is harmfully overleveraged, and management </p><p>has only committed to kicking the can down the road with exchange offers and maturity </p><p>extensions. Finally, the operational strategy has been focused around low-growth, low margin </p><p>products and has missed opportunities to compete in more robust segments, such as corrugated </p><p>paper. </p><p>Under the current capital structure and declining earnings power, our status-quo scenario </p><p>analysis indicates that the Company will become insolvent by 2014. The purpose of this report is </p><p>to provide a two-pronged Plan of Reorganization (POR) to Versos Board of Directors, which </p><p>we believe will strengthen the Company operationally and restore it to financial health. </p><p>1. Operational Restructuring The operational restructuring would be realized by adding </p><p>corrugated paper manufacturing capabilities to the Companys four existing paper </p><p>machines. The conversion process would require capital investment of $10 million per </p><p>machine. The capacity shift toward corrugated paperand away from coated/freesheet </p><p>papercreates an opportunity to capture demand in a growing market segment and to </p><p>diversify the Companys product mix. All together this should provide greater and less </p><p>volatile income streams. </p></li><li><p>Restructuring Verso Paper Corp. </p><p> 5 </p><p>2. Balance Sheet Restructuring The recapitalization plan simplifies the capital structure, </p><p>lowers the Companys debt burden, and rebalances the debt/equity mix for greater </p><p>financial health. The proposed capital structure for the Company consists of (i) New </p><p>Secured Debt of $270 million, equivalent to 1.8x LTM EBITDA, and (ii) New Senior </p><p>Unsecured Debt of $475 million, equivalent to 3.2x LTM EBITDA. This results in $745 </p><p>million of total debt at 5.0x LTM EBITDA, versus current total debt of 8.8x LTM </p><p>EBITDA. In addition, we plan to maintain a revolving credit facility of $200 million, </p><p>undrawn at the close of the restructuring, which will provide additional liquidity for </p><p>working capital. Under the restructuring operating case the equity of the Company </p><p>following the recapitalization is $537 million, which represents 42% of the estimated </p><p>enterprise value. The proposed POR provides for the full recovery of existing Senior </p><p>Secured creditors, the Second Priority Senior Secured creditors and the Senior </p><p>Subordinated Notes. The recovery for the Senior Unsecured Term Loan is just under par. </p><p>With an estimated enterprise value of $1,282 million, the current equity holders will be </p><p>wiped out, and therefore are likely to be the most critical of our proposal. </p><p>The above plan will strengthen the company operationally and provide steadier earnings </p><p>power. The concurrent reduction in debt obligations will increase cash flow that may be </p><p>reinvested or distributed to shareholders. Furthermore, we believe our recommendations </p><p>come at a crucial time when the Board is preparing to welcome new CEO Dave Paterson to </p><p>the Company. Mr. Paterson is familiar with the recent bankruptcies of competitors NewPage </p><p>and AbitibiBowater, and we would advise him to enact these changes at Verso in order to </p><p>avoid a similar outcome. </p></li><li><p>Restructuring Verso Paper Corp. </p><p> 6 </p><p>INDUSTRY </p><p>Market Trends </p><p>Despite decreased demand in certain segments, the overall market for paper and packaging </p><p>products has seen increased acquisition activity. International Paper acquired Temple Inland, </p><p>which recently undertook efforts to increase the earnings of its corrugated box plants. Rock Tenn </p><p>acquired Smurfit-Stone Container Co, the second largest producer of linerboard. These show the </p><p>industry leaders working to gain more exposure to the corrugated packaging segment, which </p><p>shows the most potential for growth. Technology has played a large role in decreasing demand </p><p>for many paper segments, but it has actually had positive effects on the corrugated segment as </p><p>the rise in e-commerce has increased the need for shipment containers for goods purchased </p><p>online. 1</p><p> The recent consolidation of corrugated container producers displayed below </p><p>demonstrated the strategic consolidation the industry has taken in order to capitalize on this </p><p>growth segment. </p><p>1 Standard &amp; Poors Industry Survey Paper &amp; Forest Products, Stuart J. Benway CFA, Paper &amp; Forest </p></li><li><p>Restructuring Verso Paper Corp. </p><p> 7 </p><p>In a measure of the industries negative outlook on more traditional paper segments, many </p><p>companies in the sector have been tested with capacity management issues given decreasing </p><p>demand. The annual capacity survey of domestic paper manufacturers, conducted by the </p><p>American Forest &amp; Paper Association published in March 2011, showed that US paper and </p><p>paperboard capacity declined 3.1% in 2010 to 91.1 million tons. This continued a trend of </p><p>declining capacity as production capability fell 1.1% per year on average from 2001 to 2010.2</p><p> In </p><p>a survey of the industry outlook for 2012 conducted by Deutsche Bank industry professionals </p><p>supported this view with over 65% of the respondents anticipating a decline in volumes of the </p><p>uncoated free sheet paper segment, 74% predicting a decline in the coated papers segment, and </p><p>71% seeing further decline in newsprint. However, 84% of respondents anticipate that volumes </p><p>for corrugated boxes would be flat or up as much as 2% in 2012. </p><p>2 Standard &amp; Poors Industry Survey Paper &amp; Forest Products, Stuart J. Benway CFA, Paper &amp; Forest Products Industry Analyst, February 9, 2012 </p></li><li><p>Restructuring Verso Paper Corp. </p><p> 8 </p><p>The control of capacity has allowed prices to rebound from the economic downturn to current </p><p>levels, which are high relative to historic levels. Over the year 2011 many grades of coated and </p><p>uncoated paper showed increases in prices of 7%-8%. During the same year inputs cost pressures </p><p>moderated. The prices of energy and recovered paper, key inputs in the production, declined </p><p>significantly. Recovered paper prices dropped $230 per ton, down 24.3% from a year earlier. </p><p>However, the cost of chemicals used as inputs still remain high which continues to present a </p><p>challenge in the industry to maintain cost levels. </p><p>Competitive Landscape </p><p>Verso is a relatively small producer in the larger paper industry, but for the purpose of assessing </p><p>the competitive landscape there are 16 companies that warrant mention. Details of these </p><p>companies key financial metrics can be found in Exhibit 1. Three of the companies: Appleton </p><p>Paper Inc., Catalyst Paper Corporation, and New Page Consolidated Papers Inc., are directly </p><p>comparable to Verso in that they are paper producers through multi coated paper segments and </p><p>do not have a packaging business. Other companies within the comparison set represent </p><p>companies which do have paper businesses but also packaging businesses, namely: Boise Inc., </p></li><li><p>Restructuring Verso Paper Corp. </p><p> 9 </p><p>Cascades Inc., Domtar Corporation, Georgia Pacific LLC, International Paper Company, </p><p>Longview Fibre Paper and Packaging Inc. Three companies: AbitibiBowater, Sappi Limited, and </p><p>Tembec, were chosen as they represent companies with paper businesses, but also wood products </p><p>business representing a closer connection to inputs and an interesting comparison for any </p><p>synergies that could exist. Graphic Packaging International Corp. and Rock- Tenn Co. </p><p>manufacture packaging materials, for which the main input is paper rolls. These companies have </p><p>been included because of our recommendation to Verso to enter this line of business. PH </p><p>Glatfelter Co. and Neenah Paper are niche paper manufactures that produce technical products </p><p>such as carbon paper and other fine stationary papers. As Verso operates in limited segments, it </p><p>is important to include a comparison of companies that operate in similarly limited segments. </p><p>The best operationally comparable companies also mirror Verso's overleveraged balance sheet. </p><p>The average debt to EBITDA ratio for the industry excluding the coated paper manufactures is </p><p>3.0x, while the average for the coated paper producers is 9.8x. NewPage filed for bankruptcy on </p><p>September 8, 2011 in order to undertake a voluntary restructuring of its debt. Catalyst Paper filed </p><p>on January 18, 2012, which is not surprising given its excessive debt levels. While in bankruptcy </p><p>not all necessary data is available to include in our cost of capital calculations, however noting </p><p>these companies in the comparison set is important for a context of debt levels in the industry. </p><p>Appleton, which is private, has continued to issue new debt and extend maturities over the last </p><p>two years, much like Verso. The context of the coated paper companies indicates that the </p><p>producers in this segment are starting to feel the effects of the decline in demand for their </p><p>product. These companies have unsustainable levels of debt that push them dangerously close to </p><p>insolvency. While Appleton and Verso have healthier EBITDA margins, it is questionable if they </p><p>will be able to sustain these margins if they must continue to support a high debt level. </p></li><li><p>Restructuring Verso Paper Corp. </p><p> 10 </p><p> Source: Capital IQ and Barclays U.S. High Yield Paper &amp; Packaging Weekly Update, April 9,2012 </p><p>AbitibiBowater, Inc., the largest newsprint producer (currently operating as Resolute Forest </p><p>Products), also provides and interesting context in the industry. It emerged from bankruptcy in </p><p>2010 after consolidating debt. Newsprint manufactures have faced more dramatic declines in </p><p>demand than the coated paper industry and therefore provide a lens of the possible future of the </p><p>coated paper industry as demand declines for printed periodicals and advertising materials.3 </p><p>AbitibiBowaters former CEO, Dave Paterson, who saw the company through the restructuring </p><p>will become the CEO of Verso effective May 14, 2012. In his restructuring of AbitibiBowater, </p><p>Paterson stressed the need for an evolving product mix and the importance of operational </p><p>flexibility.4</p><p>3 Standard &amp; Poors Industry Survey Paper &amp; Forest Products, Stuart J. Benway CFA, Paper &amp; Forest Products Industry Analyst, February 9, 2012. </p><p>4 Out of Print, Interview with Dave Paterson, The Globe and Mail Report on Business, February 2011. </p><p>Company Revenue EBITDATotal Debt Net Debt</p><p>Gross Profit </p><p>MarginEBITDA Margin</p><p>EBITDA/ Interest</p><p>EBITDA-Capex/Interest</p><p>Total Debt/EBITDA</p><p>Appleton Papers Inc.</p><p>$857.3 $87.8 $512.0 $504.5 19.8% 10.2% 1.4 1.2 5.8</p><p>Catalyst Paper Corporation</p><p>$1,276.7 $48.1 $842.0 $817.0 7.0% 3.8% 0.6 0.4 17.5</p><p>NewPage Consolidated Papers, Inc.</p><p>$3,681....</p></li></ul>