June 7th 2008

By Mike Geniella
Santa Rosa Press Democrat
June 7, 2008

Pacific Lumber Co., the North Coast's premier timber company for 125 years, will be taken over by Mendocino Redwood Co. and an East Coast hedge fund under a federal bankruptcy court decision announced Friday.

The $530 million cash deal allows Pacific Lumber, the world's largest producer of redwood products and owner of 210,000 acres of Humboldt County timberland, to emerge from bankruptcy. And it makes Mendocino Redwood Co., owned by heirs to the Gap fortune, the dominant redwood producer in a timber region stretching from Ukiah to Eureka.

The new ownership intends to revive Pacific Lumber's fortunes by sharply reducing debt, investing in milling operations at Scotia and lowering logging rates to rebuild tree inventories over time.

Friday's decision was hailed by Gov. Arnold Schwarzenegger, leading environmental groups and residents of Scotia, where the mood in the historic mill town of 1,000 turned upbeat as word of Friday's ruling spread.

"It sure beats 18 months of wondering where bankruptcy leads," said Jesse Ness, night butcher at Hoby's Market in the Humboldt County timber town.

Schwarzenegger praised the plan as offering the best long-term environmental protection for Pacific Lumber timberlands while providing a stable local economy.

The Nature Conservancy and Save-the-Redwoods League issued a joint statement lauding Mendocino Redwood, a privately owned timber company founded 10 years ago by San Francisco's Fisher family when it acquired 225,000 acres of Mendocino County timberlands.

"Mendocino Redwood has a proven track record as a successful company that cares about its workers and its forests," read the statement.

Sandy Dean, chairman of Ukiah-based Mendocino Redwood, said Friday he's optimistic that a trio of technical amendments required in the federal court's 119-page ruling can be met.

Dean said it was "too soon to say" when the new ownership might take over. "Attorneys are poring over the document," he said.

Paul Mason, deputy director of the Sierra Club, said Mendocino Redwood/Marathon venture may finally bring an end to "two decades of acrimony" surrounding Pacific Lumber operations under ownership of Texas financier Charles Hurwitz.

Mendocino Redwood's partner -- Marathon Structure Finance Fund of New York -- loaned Pacific Lumber $170 million after the company put the company town of Scotia up as security. Several months ago, Marathon solicited Mendocino Redwood to become a partner in a plan to takeover the bankrupt company.

The court-approved deal calls for Mendocino Redwood to manage timber operations, while Marathon pursues sale of residential and commercial properties to current occupants and other potential buyers.

During the Hurwitz era, Pacific Lumber was strapped with $800 million in debt following a 1986 Wall Street takeover.

Hurwitz's Maxxam Inc. sharply accelerated the company's pace of logging but paid little down on the debt, resulting in the company becoming the center of a political and environmental firestorm.

During the Hurwitz era, Pacific Lumber formed a subsidiary called Scopac so it could secure refinancing of its massive debt. Company timberlands were transferred to Scopac, which issued so-called timber notes to lenders.

In January 2007, the company filed for bankruptcy in the U.S. Southern District Court in Corpus Christi, Tex., after it no longer was able to make interest-only payments on the debt.

In Friday's decision, federal Judge Richard Schmidt rebuked the company's major lenders, led by the Bank of New York Trust Co. The banks had sought liquidation of Pacific Lumber's assets in hopes of recouping the $800 million claim they collectively filed with the court.

Schmidt said the bankers' plans would have likely ended in the closure of the Scotia mill complex, sale of the town's commercial core and the auctioning of other valuable company assets. Schmidt said that would have resulted "in a loss of jobs for the community and a way of life in the town of Scotia."

Schmidt wryly noted that local vendors who are owed in excess of $10 million would not have received any payment under the banks' plan.

Schmidt also dismissed bankers' complaints that the Mendocino Redwood/Marathon partnership was offering too little for the timberlands.

"After carefully reviewing all the expert testimony, the court finds that the value of the timberlands is not more than $510 million," Schmidt ruled.

The lenders have 10 days to formally seek a stay of the Texas bankruptcy court order, so they can appeal the decision. Representatives of the lenders, who include former Gov. Pete Wilson, could not be reached Friday for comment.