The NewPage Wisconsin Rapids paper mill is the largest producer of printing-grade paper in the state, able to produce nearly a half million tons of glossy coated paper a year. Credit: Mike De Sisti

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Invented 80 years ago in central Wisconsin, the coated paper that gave the world glossy magazines, catalogs and books with sharp, non-pulpy photos and graphics remains at the center of one of the state's biggest industries.

But today that industry, which has employed Wisconsin workers by the thousands for generations and continues to produce millions of tons of glossy paper every year, finds itself in renewed flux: Looming ownership changes pose a threat to the existence of at least some paper mills in and near Wisconsin.

The stakes are high for the nation's biggest paper-making state: The ownership uncertainties have cropped up at a precarious moment when demand for coated printing-grade paper is on the latest leg of a sharp multiyear, digitally driven decline, sparking speculation of a renewed round of mill shutdowns.

Verso Paper Corp. this year announced it wants to acquire NewPage Holdings Inc. in a deal that would combine the two biggest coated paper producers in North America — raising questions about what the merged company would do with its new excess capacity. Of the 11 mills in the merged Verso-NewPage, three would be in Wisconsin, with two more directly on the opposite side of the state line and a sixth in nearby Escanaba, Mich.

More recently, Appleton Coated LLC, another Wisconsin coated paper producer, quietly was put up for sale by its French parent company, Arjowiggins SAS, which recently closed mills in France and wants to exit the United States market for coated paper.

All three companies — Verso, NewPage and Appleton — are posting losses. Verso is groaning under the weight of so much debt that analysts believe it's headed for bankruptcy as a stand-alone company, while NewPage only recently emerged from bankruptcy itself. Both previously have shuttered U.S. mills. Appleton operates a single but large mill in the Fox River town of Combined Locks.

No one can be sure what changes will accompany the new ownership configurations. There's a chance that Wisconsin will be spared, at least for the time being, at the expense of other states like Maine, the nation's second-largest paper-making state, where both Verso and NewPage have mills.

Wisconsin is no stranger to mill shutdowns. NewPage closed three mills in Wisconsin between 2008 and 2011.

Each paper mill is a sprawling enterprise, often the main employer and economic engine in its region as well as the biggest contributor to the tax base that funds local schools and services.

As recently as 10 years ago, there was no bigger single industry in Wisconsin than its paper mills, a legacy of northern Wisconsin's dense forest cover and pulp supply, according to a study last year by the Wisconsin Economic Development Corp.

The state's disproportionate reliance on ink-on-paper industries in the age of Google and iPads is a major reason why federal data consistently rank Wisconsin as a slow-growth state.

Neither Verso nor NewPage would comment for this story. Executives at Appleton Coated, however, freely concede that the industry is rife with speculation about mill closures.

"We hear it all the time," said Doug Osterberg, Appleton's chief executive.

Osterberg, however, expects Appleton to announce a buyer in as soon as three months — a buyer he expects will keep his mill in operation. Several private equity groups already have expressed interest. "There are some offers that have been extended," but they haven't yet been satisfactory to the French parent, he said.

Appleton employs 600, although it had several hundred more at its peak. It has reduced its dependence on commodity magazine-grade paper by producing its trademark Utopia paper for high-end publications and luxury marketing materials. It also uses as much recycled pulp as it can, appealing to the green sensibilities of many readers.

"We are very confident that deal is going to come together soon," said Ann Whalen, a senior vice president at Appleton.

The Verso-NewPage transaction, which would create a new entity with undoubted market dominance, is plodding through a lengthy antitrust review. Some predict the Department of Justice will mandate the sale of one of the mills as a condition of its approval.

Overstocked product

Regardless, there is no question that too many mills in North America already produce too much coated publishing paper.

According to RISI, the leading research group for the international pulp and paper industry, U.S. demand for coated grades peaked in 2006, when the nation's mills had a combined annual capacity of 13.75 million tons of coated paper output.

Since then, the proliferation of tablet computers and e-readers upended the once-stable industry. Mill closures and permanently mothballed paper machines nearly halved annual capacity to 7.22 million tons currently. RISI estimates another million tons of coated paper demand will disappear by 2017.

The combined Verso-NewPage would have an annual capacity of at least 4.2 million tons, according to the Reel Time Report, an analytical monthly industry report.

"There is too much capacity," said Chris Cook, deputy editor of Pulp & Paper Week, the leading trade journal for the North American pulp and paper industry. "Assuming that Verso and NewPage combine, the new company will take a long, hard look at its combined mill system and then they will figure out which machines and which mills make the most sense to continue operating."

Wisconsin's mill workers also feel acute pressure from China — a turn of events that few expected because China has so few trees. By becoming the world's biggest importer of recycled paper fiber and timber, while also cultivating its own fast-growing species of hardwoods, China rapidly overtook the U.S. in 2009 as the world's biggest paper producer. Blaming job losses on China and Indonesia, NewPage and Appleton Coated led lobbying efforts to impose 2010 anti-dumping tariffs on imports.

The Verso-NewPage combination is radically unconventional.

Although Verso is the acquiring company and will supply all the management of the merged company, it's half the size of NewPage in terms of sales and output. Verso has three mills to NewPage's eight.

What's more, Verso has debt of $1.3 billion, roughly equal to its annual sales, according to the Reel Time Report. "Verso is not highly leveraged, it's more like massively leveraged," the newsletter wrote.

If Verso remains independent, it's highly unlikely that it will be able to meet its obligations when its debt comes due in 2016, said Verle Sutton, editor of the Reel Time Report, echoing a widely shared view among industry analysts. "And that would force Verso into bankruptcy," Sutton said.

Since it was spun off from Connecticut-based International Paper Co. in 2006, Verso has been owned by a Manhattan-based private equity firm, Apollo Management LP.

A change of ownership

Abrupt ownership changes and financial turmoil are nothing new to NewPage, either.

In Wisconsin, NewPage has its roots in Consolidated Papers Inc., founded in 1902 in Wisconsin Rapids by the Mead family. In 1935, Consolidated patented a process to mass produce coated paper, which immediately revolutionized publishing. For much of the last century, Consolidated dominated North American production of magazine and catalog paper.

In 2000, the Mead family sold Consolidated Papers to Finnish paper-maker Stora Enso Oyj. In 2007, Stora Enso sold the mills to a New York private equity firm, Cerberus Capital Management LP, which created NewPage and began closing mills. Loaded with billions of its own debt, NewPage was forced to file for bankruptcy in 2011, emerging 14 months later with less debt and new owners.

Both Verso and NewPage now argue that a combined company would create "a larger, more efficient organization with a sustainable capital structure," in the words of Verso chief executive David Paterson.

Cook at Pulp & Paper Week expects federal antitrust authorities to approve the deal, if only because Washington will recognize the economic realities of a shrinking market. "Everybody recognizes that there isn't room for two players of that size in the U.S.," Cook said.

One risk to the merger is that creditors might balk because the transaction requires bondholders of both companies to swap their debt for new bonds with diminished value. The consensus of most analysts, however, is that creditors will reach an agreement. Showing confidence that the deal will go through, Verso recently released a statement that outlines the management team for the merged company, including plans to keep its headquarters in Memphis.

The final repercussions of the deal, however, are anyone's guess. Analysts say multiple outcomes are possible, although none involves adding new capacity. Nearly all new investment in the coated paper industry is in China and other parts of Asia, Osterberg said.

"There's no possible way that all the paper machines that are operating today will operate in two years," said Sutton at the Reel Time Report. "In fact, closures are desperately needed right now."