Catalyst Paper Enters Agreement With NewPage, Rumford To Purchase ME, WI Mills

Commentary from Dead Tree Edition

Yesterday's announcement that Catalyst Paper will buy two NewPage coated-paper mills apparently means that the merger of NewPage and Verso Paper will move forward.

Catalyst revealed that it will purchase NewPage's Rumford, Maine and Biron, Wisconsin mills for $74 million—more than quintupling the Canadian company's capacity for making coated paper. One condition of the sale is that Verso-NewPage deal be consummated.

That merger has been delayed by federal antitrust officials, who were apparently concerned that, by owning half of North America's capacity to make coated paper, a combined Verso-NewPage would have too much market power and be able to drive up prices. NewPage's sale of the two mills, coupled with Verso's decision to close its Bucksport, Maine mill, were presumably a condition of gaining the U.S. Justice Department's approval for the merger.

Catalyst would only pay about $85 per ton of capacity to make paper that typically sells for at least $850 per ton. That looks like a fire-sale price, except that the continent's demand for coated paper is half of what it was barely a decade ago. And except that we've seen this movie before, and the ending wasn't pretty.

Justice allowed the 2007 merger of newsprint giants Abitibi and Bowater to go forward only after Abitibi unloaded one of its gems, a 100%-recycled mill in Snowflake, Arizona, to Catalyst for a bargain price. But a few years later, Snowflake hit a perfect storm—Chinese buyers driving up the price of West Coast recycled paper, black liquor tax credits subsidizing competitors using virgin pulp, and the collapse of the U.S. newspaper industry—and was shut down.

Both AbitibiBowater (now called Resolute Forest Products) and Catalyst ended up going through bankruptcy reorganization and emerged as smaller but healthier companies.

Catalyst makes mostly newsprint and uncoated papers in western Canada, but does have a single machine making coated groundwood paper. With the purchase announced yesterday, Catalyst would pick up four machines that make coated freesheet, as well as coated groundwood paper, plus some market-pulp capacity.

RICHMOND, BC—October 31, 2014—Catalyst Paper announced yesterday that it has entered into an Asset Purchase Agreement (the “Agreement”) with NewPage Corp., NewPage Wisconsin System and Rumford Paper (the “Sellers”) to purchase the Biron paper mill located in Wisconsin and the Rumford pulp and paper mill located in Maine, (the “Paper Mills”) for consideration of US$74.0 million, subject to certain adjustments (the “Transaction”).

Catalyst intends to finance the acquisition through a combination of advances under its revolving asset-based credit facility (the “ABL Credit Facility”), the maximum amount of which is to be increased in connection with the Transaction. To provide additional working capital following the consummation of the Transaction, Catalyst also intends to effect a US$25.0 million offering of additional PIK Toggle Senior Secured Notes (“Additional PIK Toggle Notes”), which would form part of the same series as Catalyst’s outstanding PIK Toggle Senior Secured Notes (the “PIK Toggle Notes”).

Completion of the Transaction is subject to customary closing conditions, including the completion of the previously announced acquisition by Verso Paper of NewPage Holdings (the “Verso Transaction”), the execution of a transition service agreement, materials and service supply agreements, and certain other ancillary agreements relating to the Transaction, and certain regulatory approvals. There is no financing condition to Catalyst’s obligation to consummate the Transaction. The Agreement may be terminated by the Sellers and Catalyst in certain circumstances, including upon or at any time following the final uncontested termination of the Verso Transaction.

“With this Transaction, Catalyst will be better able to serve new and existing customers through operational synergies and a more diversified and higher value suite of products,” said Joe Nemeth, president and CEO of Catalyst.

“Our acquisition of these U.S. pulp and paper mills, once complete, will support our efforts to improve our balance sheet and enhance the Company’s long-term competitiveness,” added Nemeth.

If the Transaction is completed, the addition of the Paper Mills is expected to increase Catalyst’s production capacity by approximately 65 per cent or 995 thousand tonnes per year. The Biron Wisconsin mill has 355 thousand tonnes capacity for lightweight coated and ultra-lightweight coated paper. The Rumford Maine mill has 510 thousand tonnes paper capacity for coated specialty, coated freesheet and coated groundwood paper, and 130 thousand tonnes Kraft market pulp capacity to produce both hardwood and softwood pulp. Efficiencies are expected to be gained as overhead costs will be distributed over a larger production base. Access to new markets and business opportunities is anticipated.

Based on unaudited historical financial summaries prepared by the Sellers, the Paper Mills achieved total sales of US$782.2 million for the 12 months ended Sept. 30, 2014 and US$787.1 million for the 12 months ended Dec. 31, 2013. Total mill contribution was US$29.5 million and normalized mill contribution was US$45.6 million for the twelve months ended Sept.30, 2014, compared to US$72.4 million for mill contribution and normalized mill contribution for the twelve months ended Dec. 31, 2013. Mill contribution is a non-U.S. GAAP measure of mill operating performance defined as total sales minus the cash cost of goods sold. Mill contribution was normalized for the 12 months ended Sept. 30, 2014 for the adverse impact of extreme weather conditions and market curtailment. These figures do not include sales, general and administrative expenses which are estimated to be approximately US$10.0 million per year. Capital spending for the two mills is expected to be similar to that of our Canadian mills, approximately US$7.0 million per facility per year.

Transaction and Financing
Under the terms of the Agreement, Catalyst will acquire the Paper Mills for consideration of US$74.0 million, subject to certain adjustments, and assumption of certain ongoing obligations related to the Paper Mills. Pre-closing environmental and pension liabilities will be retained by the Sellers.

To assist in financing the acquisition and provide additional working capital, Catalyst has received a Letter of Commitment from Canadian Imperial Bank of Commerce and Wells Fargo Capital Finance Corporation Canada to increase the Company’s ABL Credit Facility by $50.0 million, from $175.0 million to $225.0 million, the maximum amount of credit available under the ABL Credit Facility. Catalyst has received the requisite consent from holders of PIK Toggle Notes to give effect to the increase in the ABL Credit Facility. The availability of the proposed increase in the ABL Credit Facility is subject to the satisfaction of certain customary conditions, including the entering into by the relevant parties of required amendments to the credit agreement governing the ABL Credit Facility.

To provide additional working capital following the completion of the Transaction, Catalyst also intends to issue US$25.0 million of Additional PIK Toggle Notes. The Additional PIK Toggle Notes will be offered by Catalyst to eligible holders of PIK Toggle Notes, with eligible offerees being permitted to subscribe for their pro-rata share of Additional PIK Toggle Notes based on the aggregate principal amount of PIK Toggle Notes held by such holders relative to the total aggregate principal amount of outstanding PIK Toggle Notes. The Additional PIK Toggle Notes will be issued at a 20 percent discount to face value. When issued, the Additional PIK Toggle Notes are expected to form part of the same series of notes as the PIK Toggle Notes. Catalyst and certain holders of its PIK Toggle Notes have executed a definitive term sheet to backstop the issuance of Additional PIK Toggle Notes. The offering of Additional PIK Toggle Notes is expected to close concurrently with the consummation of the Acquisition or shortly thereafter. As the terms of the offering of Additional PIK Toggle Notes have not been finalized, there is no certainty that such a financing will be completed or completed on the terms described above. Completion of any such offering will be subject to receipt of any required third party, regulatory and exchange approvals.

Advisors
CIBC is acting as financial advisor to Catalyst and its Board of Directors. Catalyst's legal counsel is Sidley Austin LLP and Lawson Lundell LLP.

About Catalyst Paper
Catalyst manufactures diverse specialty mechanical printing papers, newsprint and pulp. Its customers include retailers, publishers and commercial printers in North America, Latin America, the Pacific Rim and Europe. With three mills in British Columbia, Catalyst has annual production capacity of 1.5 million tonnes. Catalyst is headquartered in Richmond, British Columbia, Canada, and is ranked by Corporate Knights magazine as one of the 50 Best Corporate Citizens in Canada.

Source: Catalyst.

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Catalyst Paper Enters Agreement with NewPage, Rumford Paper to Buy Mills in Wisconsin and Maine (With Commentary from Dead Tree Edition)