Verso Paper Corp. says it may be unable to complete a $1.4 billion acquisition of its rival NewPage Holdings Inc. because of low participation in a crucial exchange offer, in which the company would exchange existing debt for another class of debt.

The deal, announced earlier this month, affects three paper mills and about 2,250 workers in Maine.

Under its terms, NewPage Holdings would receive $250 million in cash and $650 million in new debt to be issued at the closing of the deal. NewPage Holdings also would get as much as 25 percent of Verso Paper’s stock under certain circumstances. Verso Paper also would refinance $500 million of NewPage Holdings’ debt.

Verso Paper launched exchange offers for some of the debt of two of its subsidiaries. A successful debt-exchange offer – which provides new notes with different terms and maturity dates for old notes – was a condition of the merger. Under the exchange offer, the value of debt holders’ claims would be cut by about 50 percent.

Based on the amount of debt offered up in the early part of the exchange period, Verso Paper says it is concerned that the effort won’t succeed.

In a letter to NewPage Holdings on Tuesday, Verso said it has concerns “about its ability to satisfy the exchange offer requirement and thus close the merger,” according to a filing with the U.S. Securities and Exchange Commission.

In the filing, Verso Paper cited “substantially less participation” in the exchange offer than the minimum participation thresholds, and a “large disparity between what a group of non-participating noteholders has requested and what Verso is able to offer under the merger agreement.”

The tender offer will remain open through Feb. 10, Verso Paper said.

The two companies did not return calls seeking comment.

“I think the bigger deal is less the merger itself than the market’s perception of the future of the industry,” said Lloyd Irland, a forestry and wood industry expert with the Irland Group consulting firm. “Not many people are excited to finance the prospects of the industry. It does show you what a precarious spot they’re in.”

The proposed merger comes at a difficult time for paper mills across the country and particularly in Maine, the nation’s second-largest producer of paper. New technologies have cut into the market for printed magazines, international competition has escalated and the economy has remained lackluster.

Verso Paper produces 930,000 tons of pulp annually and 1.5 million tons of paper for magazines, catalogs and commercial printing such as advertising brochures and annual reports. It has 2,200 employees nationally, including 1,400 in Maine.

NewPage Holdings’ mills produce about 3.5 million tons of paper a year, including coated and specialty papers for magazines, catalogs, books, coupons, inserts and direct mail, and the specialty paper for beverage bottle labels and food packaging.

NewPage Holdings now has about 850 employees in Maine, but has announced that it will idle one paper machine in Rumford and reduce its workforce to about 700.

Combined, Verso Paper, based in Memphis, and NewPage Holdings, based in Miamisburg, Ohio, would have 11 manufacturing facilities and annual sales of about $4.5 billion.

Jessica Hall can be contacted at 791-6316 or at:

jhall@pressherald.com

Twitter: @JessicaHallPPH