Forget Gordon Gekko. If Hollywood wanted to cast a stereotypical evil capitalist, it hardly could do worse than Maxxam chief executive Charles Hurwitz. Under Hurwitz, an erstwhile corporate raider, Maxxam has butted heads with bank regulators, unions and environmentalists, not to mention a host of celebrities ranging from Frank Sinatra to actor Woody Harrelson and singer Bonnie Raitt. Maxxam has been accused of looting a Texas savings-and-loan whose bailout cost taxpayers $1.6 billion, and of decimating a tract of virgin redwoods north of San Francisco that's home to some of America's most threatened wildlife species.
Yet since January 1, the stock has climbed nearly 12% to a recent 49, giving Maxxam a market cap of $343 million. Which is a bit surprising given that Maxxam also derives a great deal of its value from a 63% stake in Kaiser Aluminum, which has been devastated by a steep decline in aluminum prices.
True, that's sharply below its 52-week high of 65. But it's also well below estimates of Maxxam's asset value, which nearly all agree is significantly north of $100 a share. And in the next few months, Maxxam looks poised to reap as much as $48 a share in cash -- nearly equal to the current stock price -- thanks to an unprecedented agreement by the federal government and the state of California to pay Maxxam nearly $500 million in return for ceasing logging operations in some environmentally critical forests.
This cash may not end up in shareholders' pockets, however. For one
thing, Hurwitz controls the voting rights to the stock. But some savvy
investors, including Knott Partners, a Long Island, New York, hedge fund
that is a Maxxam shareholder, are betting that Hurwitz finds the stock
so cheap that he will use the cash to take Maxxam private. After all, over
the past five years, Maxxam has steadily bought back stock, reducing the
number of shares
outstanding to seven million currently from nearly 9 million. These
investors believe Hurwitz would prefer to take the company private as cheaply
as possible. And they're starting to sharpen their knives to extract a
higher price. Among them is Alan Kahn, scion of the value investing firm
Kahn Brothers and a frequent litigant against corporate managements.
Says Kahn: "Maxxam sells at the steepest discount from intrinsic value from any stock I know, and the reason can be described in two words: Charles Hurwitz. We have beaten him in litigation in the past and would not be shy of litigating him in the future if circumstances warrant it."
Controversy has dogged Hurwitz, 58, for almost three decades. In the 1970s, he settled a Securities and Exchange Commission suit alleging stock manipulation without admitting the allegations. He did the same with a New York state suit alleging that he looted an insurance company he acquired in 1977. In the 1980s, funded by junk bonds, Hurwitz and Maxxam snapped up big stakes in United Savings of Texas. Then they successfully went after Kaiser and Pacific Lumber in hostile takeover deals.
In 1988, United Savings collapsed. Among other things, Federal regulators now charge that Hurwitz failed to keep up net-capital requirements, and conducted a series of high-risk deals that wiped out the thrift. Investors like Kahn and takeover artist Harold Simmons went after Hurwitz a couple of years back for alleged self-dealing. The cases were subsequently settled.
In 1995, the Federal Deposit Insurance Corp. sued Hurwitz, then dropped most of its claims except for one alleging breach of fiduciary duty. It still hopes to recover $250 million. The Office of Thrift Supervision is also suing Hurwitz in administrative court. It recently finished presenting its side. Hurwitz begins presenting his own in February.
Enter the environmentalists. Maxxam's Pacific Lumber controls some 202,000
acres of forest north of San Francisco, including huge stands of virgin
redwoods that are home to threatened seabirds, giant salamanders and coho
salmon. Under Hurwitz, Pacific Lumber has aggressively
clear-cut the forests, a practice that not only destroys wildlife habitats
but also causes huge mudslides and clogs forest streams with sediment.
The redwood controversy sparked massive protests and won outspoken support from celebrities like Raitt and Harrelson. Now the environmentalists, led by the activist organization Earth First, want the government to lay claim to more forests if Maxxam loses the thrift cases.
Already, vicious battles between environmentalists and loggers have prodded the federal government and the state of California to step in to save the forests, leading to accusations that Hurwitz in effect has held the lands for ransom.
In 1996 a conditional agreement was announced for Pacific Lumber to
sell some 5,600 acres of ancient forest in the Headwaters, an area where
three streams meet some 300 miles north of San Francisco, to the state
and the U.S., which after heavy lobbying by U.S. Sen. Dianne Feinstein
and
California Gov. Pete Wilson, agreed to provide $380 million for the
purchase. The state appropriation is contingent on the federal appropriation,
which expires in March. California has also authorized the purchase of
an additional 2,000 acres for another $80 million. This payment also is
contingent on all parties thrashing out a so-called Habitat Conservation
Plan, which would determine the management of trees Maxxam is allowed to
harvest.
Maxxam's position is that it's willing to part with the Headwaters and other acreage so long as it's justly compensated, a view that's backed by the Fifth Amendment. Maxxam officials don't believe the pact gives them full market value, but consider the price "fair" nonetheless.
The payment is by no means certain, however. Much depends on Maxxam's
willingness to reduce its violations of forest-management codes. Recently,
California officials pulled Pacific Lumber's logging license for the remainder
of the year because of violations. The number of Pacific Lumber violations
has fallen sharply, say California officials, although they haven't been
eliminated. Revoking the license won't have much impact on the company
for the
rest of the year, since the winter rainy season sharply curtails logging
activity anyway. But further violations could threaten its license for
next year.
Maxxam is also still waiting for the results of public comment on its environmental surveys and the Habitat Conservation Plan. And there are still suits pending against Maxxam and Hurwitz filed by property owners near the Headwaters, alleging the company's irresponsible logging caused mudslides and floods. Maxxam contends the landslides may have been caused by other factors.
As with most compromises, the parties aren't satisfied with the Headwaters
pact. Environmentalists hate it because it permits logging as close as
100 feet from streams where endangered coho salmon live. Clear-cutting
drives sediment into the streams, which need to be clear for the salmon
to
spawn. The pact also would grant Pacific Lumber an "incidental take
permit," which absolves it from responsibility for harming habitats of
threatened species if it happens accidentally.
Yet a great deal of political capital rests on the agreement's succeeding. After all, if it fails, Maxxam openly says it will go back to its old logging practices, which the environmentalists hate even worse.
Still, the promise of a cash payment makes investors salivate. Valuations
of Maxxam's assets range all over the map, but it's commonly agreed they
are worth far, far more than the recent stock price of 49. For example,
Paul Greenberg, director of high-yield bond research at Bear Stearns, points
out that Maxxam's 63% holding in Kaiser Aluminum is worth about $365 million,
based on Kaiser's recent stock price, which is more than Maxxam's entire
market cap.
Then there's the other remaining timberland. Plus other property, including high-end real estate in California, where Hurwitz once butted heads with Sinatra over a Hurwitz-led development near Sinatra's home. And there is the Puerto Rican resort where Hurwitz has a casino, and a 91% interest in a Houston racetrack.
George Ireland, a portfolio manager at Knott Partners, thinks $122 a share is Maxxam's rock-bottom valuation. Even at its current depressed price, he notes, Kaiser is worth $50 per Maxxam share. The Headwaters cash-payment deal, fully taxed, is worth $43 a share. California's additional purchase of acreage around the Owl and Grizzly creeks is worth another $10 a share.
Activists have protested the clear-cutting of Maxxam, which may get $500 million to not log environmentally sensitive areas.
Then, Ireland conservatively reckons that the Pacific Lumber's ongoing business has averaged about $95 million a year of EBITDA (earnings before interest, taxes, depreciation and amortization, which is operating cash flow). At a multiple of 8.5 times EBITDA-the low end of forest-product transactions-that equals another $14 a share. Finally, real estate is carried on Maxxam's books at $17 a share. Total: $122 a share, excluding debt.
Ireland further notes that tally doesn't take into account Maxxam's hefty loss carry-forwards. Neither does it reflect the fact that Maxxam's timberlands should bear higher multiples because demand for redwood lumber is less cyclical. Nor does the sum allow for the fact that Maxxam's real estate is worth far more than what it's carried for on its books.
And even Maxxam's cyclical aluminum operations are bound to recover
at some point. Like the rest of the industry, Kaiser has suffered from
weak aluminum prices and its plants are being struck by the United Steelworkers.
George Haymaker, Kaiser's chief, points out that Kaiser has gained
some $120 million through cost-cutting and productivity improvements
between 1996 and mid-1998; there could be another $60 million to come.
(Kaiser had pretax profit of $60 million in 1997.)
Haymaker further notes that Kaiser could reduce its debt costs if corporate bond yields fall. And aluminum prices should recover eventually. A recent 10-year, multibillion-dollar supply agreement between Alcan and General Motors is likely to firm prices. Before Kaiser's extensive hedging program, every penny increase in aluminum prices boosts its pretax profits by $15 million, Haymaker says.
Still, any decision by Hurwitz to take his firm private means legal cases will need to be resolved. Hurwitz declined to be interviewed for this article, but made key lieutenants available to speak to Barron's. Predictably, they were noncommital.
John Campbell, Pacific Lumber's chief, says he's "fairly confident" the company will get its license renewal next year. "We've made tremendous progress," he says, adding that the company has bolstered its compliance team.
Paul Schwartz, Maxxam's president, meanwhile steadfastly maintains that there's no plan yet for what to do with the Headwaters cash. Maxxam could buy additional timberlands. And Hurwitz could just buy another company. In the recent past, Maxxam has failed in bids to buy Alumax and Continental Airlines.
Schwartz says the company may consider additional share repurchases, but adds he isn't aware of any plans to take Maxxam private. Yet one big shareholder, who asked not to be named, says that recently, he asked Hurwitz "hypothetically about taking it private, and hypothetically, he says they'd consider it. If the shares don't go up, he'll be in there buying, once he gets the Headwaters money."
Not Out of the Woods Yet
Whatever happens with the Headwaters agreement, don't expect it to end Maxxam's battles with environmentalists. Instead of spiking trees, one tactic activists have adopted to halt logging is "tree-sitting" -- climbing trees the loggers plan to cut down and surrounding them. Sometimes, however, it has resulted in tragedy. In September, David Chain, a young activist, was killed by a falling tree during logging.
But for nearly an entire year, an articulate, 24-year-old Earth First! member named Julia "Butterfly" Hill has lived on a tiny platform in an ancient, 200-foot-tall redwood that's a two-hour walk from a paved road. Tarps sheltered Hill from El Nino rains, but they do little to protect the platform from wind and lightning. Hill won't come down, though. Her tree, which she has named "Luna," grows on Maxxam land outside the Headwaters.
In a cellphone interview, Hill calls the Headwaters agreement "a land-for-money-for-destruction
purchase. It makes legal what is now illegal. Much of the area is already
protected and they should merely enforce the laws in existence. Living
in a tree for a year is not an easy thing to do, but what is happening
is so critical that people need to hear about it. Many people, including
myself, will never give up."