The European Union said Wednesday that UPM-Kymmene and Sappi's proposed $1.66 billion joint venture could restrict competition in the communication-paper market.

Communication paper is used for printed materials such as magazines, books and promotional materials.

The European Commission--the EU's executive arm--said it has sent the companies a statement of objections over their proposed tie-up. The note informs them of the EU's concerns and allows Finnish paper maker UPM and South African peer Sappi to reply, consult the commission's case file and request an oral hearing.

"The commission is concerned that the joint venture between UPM and Sappi would acquire market power allowing it to increase prices and decrease quality to the detriment of its customers for coated mechanical paper, a type of magazine paper, and for coated wood free paper," it said in a statement.

It added that it is unconvinced that integrating the relevant activities in the joint venture would bring enough benefits--in terms of cost savings or environmental or resilience improvements-- to offset the potential harm.

UPM-Kymmene and Sappi said in December that they intended to form a graphic-paper joint venture to create a more efficient, and sustainable graphic-paper business, creating a competitive cost base and offering supply security for customers.

Under the proposal, the 50/50 venture would include UPM's Communication Papers business and Sappi's graphic-paper business in Europe, and would operate as an independent company, managing its own operations, resources, and decisions.

The combined business is valued at around 1.42 billion euros ($1.66 billion) including debt but excluding expected synergies.