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Goldman Hits Paydirt With Verso, NewPage Deal

Stocks in this article: VRS GS BEN JPM OAK

NEW YORK (TheStreet) -- With little fanfare, Goldman Sachs (GS) is playing a major role in the merger of Verso Paper (VRS) and privately held NewPage, two paper industry bantam-weights who may be in the process of completing the best merger of 2014.

Verso Paper's shares have risen more than 500% since the merger was announced on Monday. Goldman and other investors who will have equity in the combined company could see further gains.

Unpacking Goldman's role in the deal shows how the firm may participate in private investments even after regulations such as the Volcker Rule, to be implemented in 2015, go into effect. Volcker seeks to limit the ability of America's largest banks to risk their own capital in private equity and hedge fund investments. Both Goldman's investment bank and its merchant banking division, a key part of the firm's so-called Investment & Lending arm, are involved in the Verso Paper and NewPage merger.

On Monday, Verso Paper said it would acquire NewPage, a privately held competitor that emerged from bankruptcy in late 2012, in a transaction that is valued at $1.4 billion.

Verso Paper is controlled by Apollo Global Management (APO) after a 2006 carve-out transaction from International Paper (IP). Apollo IPO'd the company on the New York Stock Exchange in the spring of 2008. However, debt from the buyout combined with a downturn in the global economy and the specialty paper business proved a headwind that caused shares in the company to lose most of their value within a year.

Other similarly timed deals in the specialty paper industry faced dire prospects. Abitibi-Bowater, a January 2007 merger of Bowater and Abitibi-Consolidated slipped into bankruptcy in 2009.

NewPage, a firm acquired by private equity giant Cerberus in a 2005 leveraged buyout, also came to the verge of collapse after taking on significant debt to fund a $2.2 billion acquisition of the U.S. paper operations of Stora Enso, a Finnish paper, forestry and packing industry conglomerate.

In May of 2008, Cerberus hired Goldman Sachs to attempt an $805 million initial public offering of NewPage. Two years later, the IPO was pulled and in September of 2011, NewPage fell into bankruptcy. When NewPage exited bankruptcy just over a year later, Goldman owned the new equity in the company, while Cerberus had lost its equity investment, according to sources familiar with the situation.

And that's where Goldman's involvement in the merger with NewPage and Verso Paper comes into focus.

Goldman Sachs declined to comment.

GS Credit Partners

As Cerberus and the bankers at Goldman Sachs worked to list NewPage shares on the New York Stock Exchange in the spring and summer of 2008, another part of Goldman Sachs, the firm's mezzanine investment arm, Goldman Sachs Credit Partners, had already lent a total of $2.1 billion to the company. Filings with the Securities and Exchange Commission show that in December 2007, NewPage opened a $500 million senior secured revolving credit facility and a $1.6 billion senior secured term loan credit facility with GS Credit Partners.

Documents show that as a result of those $2.1 billion in secured loans, GS Credit Partners then played a key role in NewPage's bankruptcy process. NewPage, which counts one Goldman executive as a board member, also rejected a $1.425 billion takeover bid by Verso Paper in September 2012, a few months before the firm emerged from bankruptcy.

By way of its first lien debt, GS Credit Partners effectively owned NewPage's new equity were it to emerge from bankruptcy. That debt appears to have changed hands during NewPage's bankruptcy process, with Goldman distributing holdings to outside investors. By the time NewPage exited bankruptcy, first lien note holders were paid $103 million in cash and given new equity in NewPage. GS Credit Partners had distributed most of its interest to private clients during the process, according to a source directly familiar with the situation.

According to a May 2013 filing, Goldman retained an 11.3% interest in NewPage's equity. Asset manager Franklin Resources (BEN) held a 14.3% equity interest in NewPage, while JPMorgan Asset Management, alternative asset manager Oaktree Capital Management (OAK) and Centerbridge Partners held equity stakes of 12.6%, 12.1% and 10.4%, respectively, filings show.

Those equity interests are likely to translate into holdings in the merged Verso Paper and NewPage, if Monday's deal closes.

NewPage's post-bankruptcy equity holders will receive total cash and debt consideration of $900 million, consisting of $250 million in cash that is expected to be paid out as a special dividend during the deal's closing process, and $650 million of new Verso first lien notes that are also a stipulation of the merger. Those NewPage stockholders also will receive shares between 20% and 25% of Verso's common stock immediately prior to the closing of the merger.

For its part, Verso will finance the acquisition through $750 million in debt, which will be used to refinance some of NewPage's existing debt. Overall the $1.4 billion value of Monday's transaction is calculated by Verso Paper as consisting of $250 million in cash that will be paid to NewPage shareholders, $650 million of new Verso first lien notes, Verso common stock, and the refinancing of a $500 million term loan.

As part of the deal, Verso second-lien and subordinated debt holders are poised to see the par value of their claims cut by about 50% in the debt refinancing, which is scheduled to occur after the merger's closure.

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