December 28th 2007

By Mike Geniella
The Press Democrat
December 28, 2007

A joint $500 million proposal by Mendocino Redwoods Co. and a New York investment firm to take over bankrupt Pacific Lumber Co. is drawing praise from North Coast timber industry leaders and environmentalists.

But still unclear is whether the proposed deal is big enough to satisfy a long list of creditors, including a group of East Coast bondholders who are owed at least $750 million.

Under Mendocino Redwoods' plan, the bondholders -- who include the Bank of New York -- would be only paid two-thirds of what they're owed: $175 million in cash and the issuance of a new $325 million note.

A federal bankruptcy judge has set a Jan. 31 deadline for the submission of plans to pay off debt and reorganize Pacific Lumber, still the world's largest producer of premium redwood products.

Maxxam Inc., the Texas-based corporate parent of Pacific Lumber, sought bankruptcy protection for the 140-year-old North Coast timber firm earlier this year after it was unable to make a $27 million interest payment on its bond debt.

So far, there are three rival plans to pull the company out of bankruptcy, and at least one more is expected by the Jan. 31 deadline.

Maxxam owner Charles Hurwitz, a Houston financier who seized Pacific Lumber in 1986 during a $850 million junk bond buyout, is proposing to fully repay creditors. His plan would require the company to raise more than $1 billion by selling 6,600 acres of old-growth redwoods that are designated as conservation land, and developing 136 luxury estate sites across 22,000 acres carrying price tags of $5 million each.

Unhappy bondholders, who scorn the Maxxam plan as highly speculative, want to foreclose on Pacific Lumber's 220,000 acres of Humboldt County timberlands and sell the land to secure payment.

At the core of the bankruptcy fight is how much the company's assets are worth.

Pacific Lumber, bondholders, lenders and unsecured creditors are at odds over the company's valuation. Estimates of the timber company's worth range from the bondholders' low-end estimate of less than $500 million to Pacific Lumber's high-end estimate of $1.4 billion.

Mendocino Redwoods and Marathon Asset Management, a New York City-based group, are proposing a joint venture that they describe as in between "these extreme alternatives." The proposal envisions Pacific Lumber production facilities and timberlands operating as a single entity.

"We believe the plan will keep Pacific Lumber intact, protecting jobs while restoring the forests," said Sandy Dean, chairman of Mendocino Redwoods.

The Ukiah-based company is largely owned by members of San Francisco Fisher family, which in 1998 bought 230,000 acres of Mendocino County timberland once owned by Louisiana-Pacific Corp. Since then, Mendocino Redwoods has kept 350 people employed at its Ukiah sawmill complex, and a huge lumber product distribution center north of town. Its local payroll exceeds $17 million annually.

Since its formation, Mendocino Redwoods has won recognition for its forest management policies, including certification by the international not-for-profit Forest Stewardship Council.

Dean said Mendocino Redwoods would bring the same management policies to Pacific Lumber timberlands, which he said are still among the best stocked industrial forests despite 20 years of intense logging.

"We employ a long-term investment strategy, and I think the results in Mendocino County are starting to show the results," said Dean.

Among the results, according to Dean, is a 25 percent growth in overall timber volume on its Mendocino holdings, a company policy that bans clear-cutting, and an $11 million program to reduce run-off into streams across company forestlands.

"We would bring similar management to Pacific Lumber lands," said Dean.

While the Mendocino Redwoods plan is likely to be among several considered by a federal bankruptcy judge, its possibilities of long-term ownership, job stability and environmental safeguards is already being applauded by North Coast residents.

"I believe it's viewed in a favorable light," said Mark Lovelace of the Humboldt Watershed Council. The council is an organization of local residents, environmentalists and property owners working to restore water quality and fisheries.

Sam Johnston, a spokesman for the Environmental Protection Information Center in Garberville, praised the Mendocino Redwoods' proposal.

"Of the major timber managers on the North Coast, Mendocino Redwoods stands head and shoulders above the rest," said Johnston. For 20 years EPIC has been the leading legal challenger to company logging practices under the Maxxam ownership.

Art Harwood's family operates the largest independently owned sawmill operation remaining in Mendocino County.

Harwood said the Mendocino Redwoods-Marathon bid likely represents "the best possible outcome" for Pacific Lumber, a historic company that was once widely touted for its conservative and sustainable logging practices.

You can reach Staff Writer Mike Geniella at 462-6470 or mgeniella@pressdemocrat.com.

PACIFIC LUMBER CO.

Founded: 1863

Owner: Maxxam Inc.

Headquarters: Scotia, Humboldt County

Employees: 550

Timberlands: 220,000 acres

Products: Redwood and Douglas-fir lumber and value-added goods

Source: Pacific Lumber Co.