April 10th 2008

By John Driscoll
The Times-Standard
April 10, 2008

The chairman of the Mendocino Redwood Co. fended off suggestions by bond holders' attorneys on Wednesday that it was trying to acquire the Pacific Lumber Co.'s timberlands for substantially less than they are worth.

On the stand for the first time in the U.S. Bankruptcy Court proceedings in Corpus Christi, Texas, Sandy Dean told noteholders' attorney Zack Clement that an estimate of $600 to $760 million for the 210,000 acres was put together by UBS in 2004, a firm marketing the timber owned by Scotia Pacific.

The firm approached Mendocino Redwood among others. But Dean said there was never an offer of that amount.

"We never discussed buying Scopac for $600 million to $760 million," Dean said.

Clement asked Dean if Mendocino Redwood would participate in an auction of the timberlands if Beal Bank -- the largest of the timber noteholders -- put up a bid of $600 million. Dean said that if Judge Richard Schmidt does not approve Mendocino Redwood's plan, the company would have to figure out what to do next.

Mendocino Redwood is working with Marathon Structured Finance Fund, the key Palco lender, to reorganize the more than 140-year-old timber company. Under their plan, the bond holders would get about $500 million in cash and new notes.

Beal Bank -- owned by billionaire real estate investor and poker player Andy Beal -- has reportedly made a hard offer of $603 million for the property if it goes up for auction as called for in the noteholders' plan.

Schmidt on Tuesday said that he does not believe there is substantial equity left in Palco, which, if true, could signal the end of Maxxam Inc.'s control of the company, which it took over in 1985. Palco went into bankruptcy in January 2007. It has fought to convince the court that its assets are worth more than $1 billion, if a development project to raise money could go forward as part of its plan of reorganization. That plan has had little support from creditors.

The value of the assets is key to determining which plan goes forward. Jeffrey Johnson, a valuation expert brought in by Marathon, was grilled by attorneys about how he came to his conclusions about the value of the assets, and about his criticisms of other experts' methods.

The blended company proposed by Marathon, which would hold the timber and the Scotia mill, would be worth $540 million, Johnson said. The town of Scotia would be split off as a separate entity.

He said the noteholders' estimates of the value of the timberland is overstated, as its expert treated it as tax exempt. Not factoring in that cost is similar to not accounting for any other cost of doing business, Johnson said.

Much of the testimony on Wednesday waxed technical, but the line of questioning from Palco and noteholders' attorneys appeared directed at suggesting that Mendocino Redwood and Marathon were somehow trying to get more than their money's worth.

"If the implication is that MRC is paying less than Newco (the proposed new company) is worth," Johnson said, "I disagree."

The hearing continues today at 7 a.m.