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An end to Hurwitz saga at Pacific Lumber

June 12, 2008, Houston Chronicle
COMMENTARY

By LOREN STEFFY

http://www.chron.com/disp/story.mpl/business/steffy/5834680.html

Charles Hurwitz and environmentalists agree.

You read that right. After two decades of bitter feuding, the war of the redwoods appears to be ending the only way it could: with Hurwitz's exit from the timber business.

Last week, a bankruptcy judge in Corpus Christi indicated he favors a reorganization plan for Pacific Lumber that would transfer ownership from Houston-based Maxxam Corp., which Hurwitz controls, to Mendocino Redwood Co., a timber company based in Ukiah, Calif.

Environmentalists favor the plan because Mendocino, owned by the billionaire Fisher family that founded the Gap retail chain, has a history of enviro-friendly logging practices. Hurwitz favors it because it preserves Pacific Lumber and its 300 jobs in the company town of Scotia, Calif.

"It's a fantastic company," Hurwitz said of Palco, as the company is known. "The guys at Mendocino are good people."

Bondholders could still derail the deal, but it appears Mendocino will prevail, paying $580 million for Palco and its 210,000 acres of redwood timberland.

Mendocino's advantages

So how does Mendocino hope to make the deal work when Maxxam couldn't?

It has a few advantages. It's a private company, so it can take a longer-term view of profitability without worrying about delivering quarterly numbers to investors.

"That's a luxury public companies don't have," Mendocino Chairman Sandy Dean said.

Second, the bankruptcy process has eliminated about $600 million in debt, easing the pressure on Palco's profit margin.

Personification of doom

Most importantly, though, Mendocino doesn't have Hurwitz.

For two decades, Hurwitz has been the personification of environmental doom painted by a legion of activists in northern California.

Nothing he did, including agreeing to some of the most arduous environmental restrictions ever imposed on a timber company, could appease them. As long as they had Hurwitz, they had someone to vilify.

Hurwitz, for his part, didn't recognize until it was too late how the environmentalists could disrupt his business. By then, both sides were stuck.

Maxxam in the 1980s wasn't a long-term investor. It used junk bond financing to take over an undervalued lumber company. The playbook for such deals called for restructuring the company and selling it a few years later.

By the time Hurwitz was ready to sell, he had a full-blown war on his hands, and no one wanted to buy into it.

As part of the 1999 agreement that set aside thousands of acres of old-growth redwoods as a preserve, Hurwitz agreed to reduce Palco's timber harvest, but it didn't matter. As long as trees were cut in his name, the environmental groups kept up the fight.

That left Palco cutting far less timber than the deal allowed and unable to make enough money to pay its debt.

Mendocino claims it can make money while cutting less than a third of what's permitted under the 1999 pact.

Few companies, of course, ever truly win the support of environmentalists. Despite its sustainable logging efforts, Mendocino, too, has been the target of protests and "tree sits," and even a campaign to boycott Gap stores in the past. Nevertheless, its logging practices are less aggressive than Palco's under Hurwitz.

Perhaps Mendocino learned from Palco's plight. It has been conducting a series of meetings in California's Humboldt County, explaining its plan. It's an openness that Maxxam never had.

Ironically, though, the success of the plan environmentalists favor hinged on Maxxam itself. In bankruptcy cases, secured creditors typically rule.

It's unusual that Judge Richard Schmidt didn't simply allow bondholders to sell timberland to the highest bidder and recover the money they're owed.

Mendocino's plan gained traction after Maxxam backed it.

"It was gracious of Maxxam to support our plan," Dean said. "Their support helped improve our plan significantly."

Not a victory

The plan is far from a victory for Maxxam. It loses control of Palco, its investment withered away by two decades of timber wars. If it had to give up control, though, the Mendocino plan offers the best option for preserving Palco, which Hurwitz said was important to him.

Maxxam, which wasn't in bankruptcy itself, is left with some real estate properties and its Houston horse-racing track.

For environmentalists, the plan offers hope that a company they've long despised will change its practices, striking a balance between environmentalism and capitalism.

Perhaps it's only fitting, then, that in this, the denouement to the timber wars, they and Hurwitz finally agree.