BANGOR – Great Northern Paper Inc.’s unsecured creditors are preparing to fight a $91 million bid from Belgravia Paper Co. Inc. to buy the bankrupt company’s two mills because it could discourage better offers from other suitors.

“We find it problematic,” said Jay Geller, an attorney for the unsecured creditors committee, on Wednesday. “In the committee’s view, it is intended to chill bidding during the court auction.”

In addition, Geller said the committee believes the mills are worth more than what Belgravia wants to pay for them.

But the president of Belgravia, Ronald Stern, said in a telephone interview Wednesday night from his office in Vancouver, British Columbia, that he is not concerned about the committee’s effort to change his offer. Instead, he said, he is focused on preparations to open the mills in Millinocket and East Millinocket as soon as possible after a tentative April 21 closing date.

“The real issue is can we, or anybody else, put together a business plan to make it a profitable company,” Stern said. “We’re focusing on that.”

Belgravia’s offer, filed Tuesday in the U.S. Bankruptcy Court in Bangor, is the “stalking horse bid” in an auction for Great Northern. Other interested buyers are required to meet or beat Belgravia’s offer, but they must meet financial conditions that the Canadian company was entitled to lay out in its bid.

According to the terms of Belgravia’s bid, any other offer for Great Northern must be at least $2 million higher than the last accepted bid. Plus, the bidders must agree to pay a $5 million “break-up fee” to Belgravia if they are successful in toppling the Canadian company as the buyer.

Geller said the creditors committee would fight the break-up fee because it is a possible deterrent to other bidders.

“We think it is out of the ordinary, unreasonable, and we intend to oppose it,” he said.

Stern, however, disagrees. He said a team of professionals is working to complete a viable business plan to turn a money-losing paper company into a stable, profitable one. That costs money, he said.

“I’ve been advised that these things are normal and appropriate in this kind of process,” Stern said. “It’s absolutely normal, given the amount of effort that’s required.”

Stern is chief executive officer and the major shareholder of Belgravia Paper, which owns four paper companies in Canada and the United States. According to ForestWeb.com, a paper industry Web site, Stern was co-founder of Alberta Newsprint Co. in Whitecourt, Alberta, in 1989, along with West Fraser Timber Co. Ltd., and still holds a 25 percent interest in the plant. Alberta recently postponed plans to build a new newsprint mill in Saskatchewan, ForestWeb.com reported.

Belgravia Paper Co. Inc. is a subsidiary of Belgravia Investments Ltd., which has an office in Vancouver, but is registered in the Bahamas. Along with Alberta Newsprint, Belgravia Paper’s subsidiaries include St. Mary’s Paper Ltd. of Sault Ste. Marie, Ontario, West Linn Paper Co. in West Linn, Ore., and Pasadena Paper Co. in Pasadena, Texas. All of the mills produce grades of groundwood paper similar to that manufactured at Great Northern, including specialties and supercalendered grades used in catalogs and newspaper inserts, according to ForestWeb.com.

Belgravia’s offer

According to court documents filed Tuesday evening, Belgravia will assume $71 million in debt and pay $20 million in cash for Great Northern. Also included in the offer is a $25 million “earnout,” whereby Belgravia agrees to pay 15 percent of its net profit each year if the profit is greater than $15 million. The money would go to the bankruptcy estate of Great Northern to pay creditors. The percentage of profits would be paid over a five-year period, but the “earnout” clause of the deal would expire at the end of the five years if the $25 million amount were not reached.

“This is not a large level of profitability for the size of this operation,” Stern said. “It’s a very minimal target.”

But Geller said the earnout clause is unacceptable because it is “speculative and may not be realized.”

Richard Mikels, an attorney representing Great Northern, said the paper company has not placed any conditions on Belgravia to ensure it meets the $15 million net profit goals each year for five years. Those requirements usually aren’t a component of an initial offer.

“Right now, all we have is a letter of intent to buy Great Northern,” Mikels said. “The parties will be negotiating a purchase and sale agreement.”

Great Northern filed for Chapter 11 bankruptcy protection Jan. 9, and at the time said it had more than 1,000 creditors and more than $100 million in debt. Since then, Great Northern has assumed at least another $22 million in loans.

At least $62 million of the debt is in the form of equipment leases and loans that were given by Boeing Capital Corp. of Long Beach, Calif. In its offer, Belgravia will assume $50 million in the equipment leases, Mikels said.

The offer also includes $20 million in cash, which will be spent to pay back at least $12 million that is owed to Boeing in loans.

According to Daniel Sklar, an attorney for the unsecured creditors committee, only $5 million in cash could become available from the $20 million, and that would need to be divided among the unsecured creditors. How much each creditor would be paid, if at all, is unknown because it is unclear just how much Great Northern owes its unsecured creditors, he said.

“Whether that’s 2 cents on the dollar or 80 cents on the dollar, I couldn’t tell you,” said Sklar about the creditors’ payments.

Because of a change in attorneys last week, Great Northern has asked for more time to submit a comprehensive list of assets and debts to the bankruptcy court.

How much are mills worth?

Attorneys for Great Northern’s creditors believe that Belgravia or any other interested buyer could do significantly better in its offers than the $91 million that the Canadian company has introduced to start the auction. Geller said Belgravia’s bid is not reflective of the actual real valuation of the properties, and added that a thorough assessment of the mills’ worth is needed, especially since they have been shut down for more than a month.

At this time, he said, “we don’t have documents to show a fair market value.”

Stern, however, said market conditions and what interested buyers are willing to pay for the mills will determine Great Northern’s worth.

“I’m not looking to have a debate with them about that,” Stern said. “That’s what the process is all about. If that’s what other people in the industry think, they’ll be involved in the process [and outbid Belgravia.]”

For the current fiscal year, which ends June 30, the town of East Millinocket has placed a value of $146 million on its mill, but Great Northern has told town officials that it believes the value is $133 million. The town of Millinocket said the mill there is worth $216 million.

“That’s not what I’m focused on,” Stern said. “I’m focused on what were the losses last year and how do you go from those losses to a viable operation.”

U.S. Rep. Michael Michaud, who worked at Great Northern for 29 years, said Wednesday that he believes that Belgravia’s offer will be topped.

“This offer was an initial offer and certainly the bidders know that there’s more value there,” Michaud said.

On Wednesday, Stern acknowledged that what piqued his interest in Great Northern was not the operating losses of about $50 million a year for the last three years. Instead, it was the fact that it “has three good paper machines that are very attractive in the industry,” including the No. 11 supercalendered paper machine in Millinocket that recently was reconfigured, costing Great Northern about $150 million.

According to industry observers, what is making Great Northern attractive to at least six potential buyers is the refurbishment of the No. 11 machine that was undertaken by Great Northern owner Lambert Bedard.

“It definitely didn’t hurt,” said Mario Albanese, executive director of The SC Council in New York City, a trade organization for supercalendered paper producers. “It brought Great Northern up to the level they needed to be. The machine is a great machine.”

Mill workers and others in the industry have criticized Bedard for selling off Great Northern’s rights to timberlands and an energy generator to pay for the machine, especially since the market for supercalendered paper has eased in the last few years. But in a series of interviews being aired this week on WABI-TV, Channel 5, Bedard said the investment was the right thing to do, and “I would do it again.”

“Our timing was wrong, but nobody could predict that,” said Bedard.