Struggling Norwegian newsprint maker Norske Skog has agreed to sell two Korean paper mills to private equity funds, in a transaction valued at Nkr4.3 billion ($830 million).

The mills on sale are the Jeonju mill, with a capacity of 825,000 tonnes of newsprint a year, and the Cheongwon mill with a 190,000 tonne capacity. The transaction is priced at $820 per tonne of production capacity, and is said to be higher than what some analysts predicted.

The sale takes away a significant part of Norske Skog's debt saddle, and will allow its management some breathing space to look at areas such as profitability and help them reschedule maturing debts. In a statement, Christian Rynning-Tonnesen, chief executive, said the sale would give the company more financial flexibility, and provide an improved basis for the further work to restructure the group.

Norske Skog has Nkr8 billion of debt maturing in 2010-11.

The transaction is expected to be completed by August. As part of the deal, Morgan Stanley Private Equity Asia and Shinhan Private Equity of Korea will pay Norske Skog Nkr3.2 billion ($620 million) in cash for the two mills, and will take on liabilities including the repayment of a $130 million inter-company loan that is to be repaid to Norske Skog from Norske Skog Korea Co Ltd. at closing.

Norske Skog shaes had lost three quarters of their value over the past year, with the company struggling with losses, and fuelling talk of it becoming a takeover target. Post the announcement of the sale, its shares went up by a quarter.

In the cyclical newsprint industry, overcapacity, weakening demand and prices, a depreciating dollar and increasing cost of wood are seeing Nordic newsprint manufacturers shut down mills. Speculation about further consolidation in the industry is rife.

Norske Skog has 19 paper mills across 14 countries, and claims a production capacity of about 11 per cent of the world's newsprint, and around 5 per cent of world magazine paper. The second largest producer of newsprint in the world, the company bore the brunt of the industry's bad news as the price of newsprint plummeted, with North American producers channeling their production from their weakening home market into Europe.

Newspaper sales in the US have been dropping ever since the population has started to prefer to get their news online, which is a faster and more cost effective medium. Norske Skog has announced a number of production cuts, layoffs and restructuring over the past two years.

In spring this year, Norske Skog had taken a Nkr940 million hit to reduce 450,000 tonnes in capacity, a seven per cent rollback of the group's total capacity, by canceling expansion plans for a mill in Brazil. The company has been under pressure from activist shareholders who would like to see it shed some of its debt load jettisoning its Asian operations. Selling its Korean operations reduces Norske Skog's net debt by a quarter, to Nkr11.9 billion, reducing its gearing from 1.12 to 0.84. The gearing ratio is used as a covenant in Norske Skog's bank loan agreements, and ideally should not cross 1.40.

Though Norske Skog is still highly leveraged, chief executive Rynning-Toennesen said its debt level is now comfortably within the covenants.