By Nathan Rushton
The Eureka Reporter
April 9, 2008
The Pacific Lumber Co.'s bankruptcy confirmation proceedings entered the second day in Texas Wednesday with the appearance of one of the top executives from Mendocino Redwood Co.
Sandy Dean, chairperson of MRC's board of directors, took the stand Tuesday to testify about the company's reorganization plan it has submitted to the court with PALCO creditor Marathon Structured Finance Fund.
Dean said MRC has looked at PALCO as a struggling timber company and mill operator that owned a highly politicized swath of lands, which he said MRC believes it could improve with what he said is its proven business operation model.
"We have felt like this is a company we could do a lot with over a long period of time," Dean said.
However, attorneys for the competing plans have argued MRC plan for the company is a "low-ball" bid that undervalues the company's worth and fails to pay in full the other creditors, including the Timber Noteholders who are owed more than $700 million .
MRC's history and just what it intended to do with the company if its plan was confirmed were scrutinized.
MRC was created in 1998 through the purchase of approximately 230,000 acres of Louisiana-Pacific's forested lands in Mendocino and Sonoma counties.
Since taking over the lands, Dean said MRC has increased the inventory of timber by 25 percent through reduced harvest levels, which MRC has indicated it plans to do on Scotia Pacific Co.'s more than 200,000 acres.
It was revealed in court that MRC had considered purchasing PALCO as far back as 2004.
Zack Clement, an attorney for SCOPAC's creditor the Timber Noteholders, described sale negotiations between PALCO parent company MAXXAM and Sansome Partners, the real estate investment company of the Fisher family that owns the clothing retail company Gap Inc. and MRC.
In conversations he said occurred between the two companies in 2005 and 2006, Clement said MRC discussed the purchase of SCOPAC's timberlands for $600 to $670 million, which is less than what MRC is offering now.
While Dean said it is possible that those prices could have been discussed, he said MRC never talked about actually purchasing the lands for that amount.
In conversations and meetings with MAXXAM CEO Charles Hurwitz in Scotia dating back to 2004, Dean said Sansome had already made up its mind and declined to make a bid.
"We were certain, that for us, the assets were less than the debt of the company," Dean said.
Clement argued that MRC has built up "massive amounts" of trees on its Mendocino lands that are not being factored into its cash flow figures, which he suggested Dean also intended to do with SCOPAC's timber lands if its plan is approved.
Dean said that MRC's estimated 600 million board feet of timber is increasing at about 60 million board feet per year.
Also raised in court was a concern about a potential antitrust violation if MRC, as the third-largest holder of redwood forest lands, purchased the 210,000 acres of timberlands owned by SCOPAC, the second-largest holder of forest lands.
The largest timber owner is Green Diamond Resource Co., which owns an estimated 450,000 acres of lands.
If its plan was confirmed, Dean said MRC would own about a third of the redwood forest acreage.
"We would be the No. 2 player," Dean said.
Dean said the antitrust issue was something his consultants were examining, but it is something he believes is an exempt transaction under the law.
Also taking the witness stand was Jeffrey Johnston, a business valuation consultant hired by Marathon to perform a valuation of the reorganized company under MRC and Marathon's plan, which he estimated to be worth $540 million.
Under cross-examination, the Timber Noteholder attorney argued Johnston's "misleading" calculations based on the wrong comparison of companies justified why MRC was proposing to pay less for SCOPAC than what others estimate its value to be.
"If the implication is that (reorganized company) is worth more than $540 million, I disagree," Johnston said.
While he said he didn't think any deal among the parties would be reached Wednesday, Judge Richard Schmidt encouraged the parties to try and work toward a deal.
"No question about that," Schmidt said.
The hearings are scheduled to continue this morning at 9 a.m. in Corpus Christi, Texas.