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Nippon Paper Group Inc., the country’s second-largest pulp and paper company, will propose a tieup with Hokuetsu Paper Mills Ltd. next week, sources said late Wednesday.

The move could deal a further blow to market leader Oji Paper Co., after its hostile takeover bid for Hokuetsu failed.

Nippon Paper helped Hokuetsu fend off Oji’s tender offer, taking an 8.9 percent stake in Hokuetsu.

Hokuetsu appears open to an alliance. An official with the company was quoted as saying, “We would seriously consider such a proposal.”

The proposed tieup is expected to include cost-cutting and steps to improve capacity utilization at the two firms’ plants, a move that may lead to the largest production alliance in the industry, the sources said.

Nippon Paper plans to install high-technology production lines for printing paper, its mainstay product, in November 2007. Hokuetsu is expected to follow suit by the end of 2008.

Nippon Paper is considering making paper under the Hokuetsu brand at its plant in Miyagi Prefecture before Hokuetsu’s factory in Niigata Prefecture goes into full-scale production.

The proposal will also likely include mention of future cooperation in overseas markets, mainly in Asia, the sources said.

One possible tieup would be for Hokuetsu’s products bound for the U.S. to be manufactured at Nippon Paper’s factory in Ishinomaki, Miyagi Prefecture, and those for China and other parts of Asia at Hokuetsu’s Niigata factory, they said.

Nippon Paper is expected to push for a tieup with Hokuetsu, while allowing its smaller partner to maintain its alliance with Mitsubishi Corp. in procurement and distribution.

The trading house is now Hokuetsu’s largest shareholder and operates its own papermaker, Mitsubishi Paper Mills Ltd.

In the wake of the failed takeover bid, meanwhile, Oji said Tuesday it is planning to strengthen its competitive position by spending 50 billion yen to 60 billion yen to install advanced equipment at its plant in Tokushima Prefecture.

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