It Was Predictable All Along
Maxxam's Bleeding of Humboldt County
December 31, 2005
What We Know
* After the take-over in 1985, Maxxam nearly tripled Pacific Lumber's (PL) rate of cut, doubling the operating income but still lost an average of $20 million a year.
* PL cut 10 years worth of trees in 7 years. In 1987-1997 it cut half its inventory. The 1999 "Headwaters Deal" allowed 178 million board feet/year, which would deplete the timber inventory in 18 years. PL logs at 2-4 times the rate of other companies in the area, like Green Diamond, Hawthorne Timber, and Mendocino Redwood Company.
* Over 80% of the land in the Freshwater Watershed has been logged in less than
15 years.
* Maxxam, in 1985, spent very little of its own money to purchase Pacific Lumber, an asset-rich company nearly free of debt. With the help of the infamous junk bond swindler Michael Milken, Maxxam CEO Charles Hurwitz financed the (barely-legal) take-over with junk bonds, loading an $868 million debt burden onto the company (the purchase price was approximately $900 million).
Where Did the Money Go?
* Almost none of the profits from the 1985-2005 period (estimated at $2.5 billion) have gone to pay the debt.
* Maxxam has taken at least $724 million in PL funds directly to Houston (netting $600 million); that is an over 500% return on their investment.
* Shortly after the purchase, Maxxam liquidated many of the assets, including an office building in San Francisco, PL's welding division and forestland in Santa Cruz, yielding $422 million. Where did this money go? (Hint: Texas town beginning with H.)
* The federal government and California (you and I) purchased 7,472 acres for approximately $95,000/acre in the Headwaters Deal, giving the company $480 million plus additional timberland. Where did the money go? (Hint: same Texas town.) Oh yes, and in that Texas town, CEO Hurwitz got an $11 million bonus for his negotiation skills in sealing the deal.
* The debt has been refinanced three times since the take-over, most recently in 1998, each time bringing the debt back up to $860 million.
* Refinancing manipulations created the current ownership, in which ScoPac, as a subsidiary of PL, owns the timberlands and the debt, and PL owns the mills and the town of Scotia. By this ownership separation, ScoPac sells its logs to the PL mills, although ScoPac has no senior management personnel of its own. ScoPac itself, but not necessarily its parent PL, is facing the imminent bankruptcy possibility since it holds the huge debt burden. Thus, PL's $25 million investment in the Scotia mill is not threatened. Make sense yet?
* The next large interest payment ScoPac is facing is due in January, 2006.
* California State Water Board economist and geologist Michael Gjerde surmised in a report released in May, 2005 that even cutting every tree left would likely not yield enough money to pay down the debt. The report recognizes the "deliberate business decisions, not regulatory decisions" that brought PL to its current economic state. The paper by Gjerde, "Comments on the Pacific Lumber Company Economic White Paper," can be downloaded from the EPIC website at http://www.wildcalifornia.org/cgi-files/0/pdfs/1115337104_Private_Land_State_Water_Board_Report_on_PL_Finances.pdf
What They Knew:
Consultants hired by Houston-based Maxxam upon their purchase of the timber company said in 1986 that PL's forests could not sustain a doubling of 1985 harvests indefinitely, stating, "Continuance of double 1985 harvest levels for many years beyond 20 will result in liquidation of the forest."
Whose Fault Is It?
Mr. Hurwitz, members of his immediate family, and trusts they control collectively own approximately 68.8% of the aggregate voting power
of Maxxam.
Maxxam style management has destabilized the community, depleted the timber base, fouled our streams, brought whole hillsides down and left the
people of once quiet, peaceful towns like Scotia and Rio Dell holding the bag.
Busting Though the Rhetoric:
Maxxam has been decrying their economic woes, saying they must get approval (for just these dozen Timber Harvest Plans (THPs), or six THPs; and now one that they had the audacity to name Bonanza), in order to stave off bankruptcy and disaster. Actually, the crash has been long in the making, and was always unavoidable due to the nature of the company's practices.
What Could Happen -- Boom and Bust Economies 101
* Bankruptcy: Corporate bankruptcy can be complicated and the corporate reorganization that ensues can take years. Depending on decisions made by the bankruptcy court, Maxxam could continue to operate the company via negotiation with the bondholders.
* Sale of some acres to the State, a non-profit land trust organization, or another corporation.
* An interest payment is due in January. PL made the last interest payment in July, 2005, by the skin of their corporate teeth. If the bonds default, company has 90 days to present a reorganization plan.
* The bondholders could negotiate a buyout. (The bondholders are the investors in the re-financed debt--an entirely different group than Maxxam's shareholders.)
Reorganization of a corporation brings opportunities to pursue different business models. As another Maxxam subsidiary--Kaiser Aluminum (purchased by Maxxam in 1988 and running many parallels to the destructive swath of changes made to Pacific Lumber)--emerges from reorganization after a Hurwitz-caused bankruptcy, it will be Maxxam-free and Hurwitz-free. The Kaiser employees' representatives--the Steelworkers Union--is crafting a more sustainable business model.
A Big Hurdle:
Because of the highly leveraged nature of PL, the huge debt burden, and the depleted resource base, it is not a very attractive piece of property to any buyer who would consider going back to anything like sustainable logging. Acquisition for public ownership is a difficult argument to make when so much public money--state and federal--has been sunk into this acreage, with most the money going to Houston.
What We Would Like to See Happen
What we would advocate and what the ecology and community need are the same: ecosystem protection that is economically viable. The best way to bring back the fisheries and working forests would be a combination of set-asides of critical biological resources, conservation easements, and functional restoration strategies.
Purchase of critical habitat and acreage in working forests for local employment are the highest priorities.
We welcome the end of the crime wave that has gripped the redwood region of California for nearly two decades. The opportunity to restore stability and ease divisiveness will be on the horizon as the sun sets on the Maxxam era.
The people of Humboldt and the forests of Humboldt deserve better. It's time for the people to reclaim their rights to their resources, their jobs, and their way of life.
