Hurwitz's Bid to Maxxam-ize Value

BYLINE: BY STEPHEN TAUB

 You can say this about Charles Hurwitz: He sure knows how to enhance shareholder 
value.

 Hurwitz, of course, is the 1980s predator who had a ball using Drexel dough to 
buy Pacific Lumber and Kaiser Aluminum. Today, these two companies, along with a 
number of real estate properties, make up Maxxam, of which Hurwitz is chairman 
and chief executive. 

 After he restructured Maxxam and bought Kaiser in 1988, Maxxam's stock soared 
from 7 3/4 to 67 1/2, before retreating to its recent 45. What a lot of people 
don't realize is that Maxxam is worth a lot more now that Hurwitz has taken 13% 
of his Kaiser unit public. Here's why:

 Earlier this year, Hurwitz hoped to bring Kaiser public by having Maxxam sell 
off 7.25 million Kaiser shares at around $ 20 to $ 22 a share. Maxxam would keep 
50 million Kaiser shares for itself. But Hurwitz postponed the offering when 
investment bankers told him the best he could get was $ 18. In July, he finally 
sold the 7.25 million shares to the public, but at only $ 14. Did he and Maxxam 
outsmart themselves?

 You don't know Charlie. By the time Kaiser got to market, Hurwitz had changed 
the terms of the offering so that Maxxam wound up keeping 75% of the proceeds 
versus the 50% it would have retained had the initial deal gone through. Along 
the way, Maxxam wound up receiving an extra $ 37.3 million cash dividend from 
Kaiser and another $ 36 million as a "tax sharing payment," neither of which were 
included in the original deal.

 Add it all up, and Maxxam wound up getting a total of $ 138 million (after fees) 
from Kaiser by waiting for the company's $ 14 offering. That compares with about 
$ 69 million Maxxam would have raked in had Kaiser completed the hoped-for $ 21 
IPO.

 What's more, although Maxxam is not permitted to sell its remaining Kaiser 
shares for 12 months, Hurwitz rewrote the terms to allow Maxxam to borrow against 
its Kaiser common. The major change enables him to do more deals.

 Sure, Hurwitz and Maxxam enriched themselves. However, all these maneuvers left 
Maxxam extraordinarily undervalued, enabling the little guy to enrich himself 
too. 

 Very simply, Maxxam's Kaiser holdings are worth $ 700 million. Yet Maxxam's 
total market value, based on 9.5 million shares (fully diluted) at its 
recentprice of $ 45, is only $ 427.5 million. So Maxxam is currently selling at 
only 61% of the value of its Kaiser stock. An arb's dream. And that is without 
even considering the value of Maxxam's Pacific Lumber holdings and its real 
estate, which account for more than 11% of Maxxam's revenues.

 True, Pacific Lumber reported an operating loss last year. However, its ability 
to pay a dividend to Maxxam at year-end certainly indicates that it has been 
meeting the covenants on its debt. It owns nearly 200,000 acres of forestland in 
northern California and is a major factor in redwood lumber. "It's covering its 
debt very easily," says one investor.

 The real estate consists mainly of resort communities and undeveloped land in 
Arizona, Colorado, Texas, New Mexico and Puerto Rico. In the company's 1990 
annual report, the real estate's book value was $ 214.2 million. Of course, real 
estate values are falling in much of the country. And it does have debt against 
it. However, whatever it's worth, the real estate is a freebie for shareholders.

 Okay, after the offering, Maxxam still has about $ 1.5 billion in debt. However, 
only $ 252 million is at the corporate level. Of the corporate debt, nearly $ 170 
million worth comes due next year. But, it's already callable, and Maxxam has 
enough cash to retire it. And as long as the aluminum, forest-products and real 
estate operations don't default, you don't need to deduct the corporate debt from 
the assets to figure out what Maxxam is worth.

 What will Hurwitz do next? He can buy back Maxxam stock. "Then shareholders will 
get a greater piece of the action from Kaiser," says one investor.

 Or, he can borrow against the Kaiser stock and make an acquisition. Next year, 
he can start selling more Kaiser share or dividend the shares to Maxxam 
shareholders to avoid paying corporate capital-gains taxes.

 And, keep in mind that this entire exercise doesn't assume a rebound in aluminum 
prices from the current depressed level. Says Andrew Racz, a managing director at 
Bishop Rosen & Co., who bought more than 14% of Maxxam for Harold Simmons 
starting at $ 9 a share: "This is one of the easiest stocks I own."


Financial World
August 20, 1991
SECTION: MARKET WATCH; Pg. 8

Copyright 1991 Financial World Partners

Copyright 1991 Reuters