Judge OKs Eastern sale plan Mass. group establishes initial $8.5 million bid

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BANGOR – Eastern Pulp and Paper Corp. will be sold at a federal bankruptcy court auction on March 17 now that a Massachusetts-based investment group’s $8.5 million offer is in the “stalking horse” position.

U.S. Bankruptcy Chief Judge James B. Haines approved the terms of the offer Wednesday night, and the company’s union officials almost instantaneously gave “thumbs up” signals.

For about two months, Eastern Pulp’s 750 displaced millworkers have endured an emotional roller-coaster ride that several times nearly derailed when terms of a deal couldn’t be worked out. Abandonment of the properties was an option that still was being considered at 5 p.m. Wednesday.

“The light is coming up,” said Ray Hinkley, international representative for the company’s PACE union. “I can see the light rising. Twenty days from now, we’re going to know who the new owner’s going to be.”

Eastern Pulp, which owned Lincoln Pulp and Paper Co. in Lincoln and Eastern Fine Paper Co. in Brewer, has been bankrupt since September 2000.

The Massachusetts investment group, formed under the name Paper Acquisitions Corp., is led by entrepreneur Robb Osinski of Salisbury, Mass., and Satish Agrawal, a former chief technical officer and vice president at Polaroid Corp. As the “stalking horse,” the group on Wednesday was able to set the terms of an auction, including establishing how much money other prospective buyers must deposit to bid and what the bid increments will be.

Part of the $8.5 million offer includes up to $2 million to keep Eastern Pulp’s mills at Lincoln and Brewer protected from equipment failure until a sale is made final, said Gary Growe, a Bangor lawyer who is trustee for Eastern Pulp’s bankrupt estate.

According to the terms of the deal, other offers for Eastern Pulp will be accepted until the March 17 auction date. The other suitors must be willing to deposit up to $2.5 million to bid, which essentially covers the money being spent to keep the mills protected, plus pay a $400,000 “breakup fee” to the investment group if it is successfully outbid.

Paper Acquisitions also ensured in its auction terms that it will be allowed to match any competing bids.

On Monday night, Osinski would not identify the other members of his investment group besides Agrawal, only calling them “high net-worth individuals.” He said the group plans to operate both mills, and its business plan includes reviewing whether to expand the research and development facility at Brewer.

Osinski and his partners at one company he owns, Performance Indicators of Topsfield, Mass., developed a color-changing technology that turns golf balls a battleship-gray color when they are waterlogged at their cores. Waterlogged golf balls do not perform well, and historically golfers have not been able to determine if found balls were filled with water because their white outer casing would stay white, almost like new.

That color-changing technology is being adapted for use in paper products, and that will be applied at Eastern Pulp’s mills along with the group’s digital imaging and coating processes. Osinski said he could not disclose what those products are, citing confidentiality agreements and his attempts to maintain the group’s advantage in a competitive paper marketplace.

“We can sell products that people currently don’t have on the shelf,” Osinski said. “This [Eastern Pulp] represents a fantastic manufacturing platform for us.”

He added that the investment group has a pool of money to invest in upgrading both mills and converting some operations to its new product lines.

For almost a week, sales terms that were acceptable to Eastern Pulp’s secured creditors were intensely negotiated, and numerous times when Paper Acquisitions and the creditors thought they had a deal, a snag would come up.

On Tuesday, the make-or-break issue was the definition of what constitutes spare parts at a paper mill. One lender, Congress Financial Corp. of New York City, wanted to make sure it wasn’t handing over to Paper Acquisitions more materials than were needed to minimally operate the mills. Congress had received authority last week from Haines to sell the spare parts as well as pulp and paper inventories to recoup some of the nearly $40 million it is owed by Eastern Pulp.

The issue was resolved by Congress and Paper Acquisitions agreeing to walk through the mills, inventory all the parts and decide what stays and what can be sold. The investors already have agreed to pay $500,000 for the parts as well as rights to intellectual properties, such as patented and patent-pending design processes and products. That figure could increase if Congress and Paper Acquisitions agree on what actually is the value for the parts after they visit the mills.

On Wednesday, another snag came up and broke Haines’ self-imposed 4 p.m. deadline to have either a deal or an abandonment plan. Corsair Special Situations Fund LLP, which is owed $2.5 million plus 17 percent interest, a total of about $3.3 million, wanted assurances that it would be paid the entire amount.

Corsair attorney Bruce Sleeper argued that Corsair was given first collateral rights to most of the mills’ real estate and property last summer when it gave the paper company an emergency loan to keep the mills operating. Sleeper told Haines that even last month, the judge had promised Corsair that no other lender would top its rights to the collateral.

But Haines countered that last month, Eastern Pulp was in Chapter 11 protection from creditors and that he made that promise when the mills still were operating. Now, Eastern Pulp is in Chapter 7, or liquidation, and the rules have changed.

Haines said that without Paper Acquisition’s offer, including the money to keep the mills maintained until the sale is closed, the only alternative would be to abandon the properties. He said Corsair had been given assurances that it will receive about $2.5 million of what it is owed, and abandonment would result in no money.

The judge, citing a federal court ruling, said Eastern Pulp’s bankrupt estate is responsible for cleaning up any hazards to humans or the environment that could result if the mills went cold.

Haines told disgruntled creditors they only would be “kidding themselves” if they believed that abandonment would result in them claiming the property and selling it piecemeal in an attempt to get a bigger payout than what they would receive from Paper Acquisition’s offer.

He said environmental cleanup costs estimated at $30 million would have to come from the secured creditors because the trustee and the state Department of Environmental Protection have no money to pay for them.

Also, witness testimony from Steve Corriveau, union president at the Lincoln mill, and Dennis McComb, environmental safety manager at both mills, established that the properties’ value would diminish if left unattended.

“I would say that in my opinion [they] would be worthless,” Corriveau said.

Sleeper proposed abandoning the Lincoln mill while allowing Corsair to maintain the Brewer mill until it could be sold to a buyer or dismantled and sold for parts. Haines said no, stating that Corsair did not give him proof that it is willing to maintain the operations and that it did not demonstrate how it would be financially harmed under the proposed offer.

Sleeper said Corsair is considering whether to appeal Haines’ ruling.

In the meantime, Osinski today will be continue with buying the mills. He attends meetings in Augusta today, and will be back in Maine on Sunday night to begin contract discussions with union officials. On Tuesday, Osinski and Congress begin taking inventory of the parts at both mills.

Osinski said he is confident a contract can be worked out.

“For anyone that works for us, we want to foster a teamwork approach,” Osinski said.

“We want to be the team,” added Duane Lugdon, also a representative of PACE.