Zellerbach Preps for ‘Battle Royale’ : Company Gearing Up to Fight Goldsmith Takeover Bid

An executive of Crown Zellerbach, the forest-products giant that is the latest target of Anglo-French corporate raider Sir James Goldsmith, is still haunted by a sight he saw on a recent business trip to New York.

“I was walking down the street and I saw the old headquarters of Diamond International Corp.,” the forest-products and packaging concern that Goldsmith acquired in 1982 and later dismembered. “It looked like a very lonely place.”

For this executive, the sight of Diamond International’s deserted offices drove home what he feels is a simple truth: that Crown Zellerbach, a 115-year-old fixture of the West Coast business community, is engaged in a fight for its corporate life. Occupants of the company’s landmark Bauhaus-inspired headquarters building here are hunkering down for a long siege.

Last week, Goldsmith threatened in a letter to Zellerbach to begin a proxy fight if Zellerbach’s directors don’t dismantle an elaborate anti-takeover defense that they installed last July.

Goldsmith, who holds an 8.6% stake in Zellerbach, said he’d contest management’s nominees for Zellerbach’s board of directors if Zellerbach’s directors fail to act by the close of business today to neutralize the company’s so-called poison pill, which would increase the cost of a hostile takeover. Zellerbach’s board, unimpressed by the deadline, will meet Wednesday to consider Goldsmith’s letter.

Goldsmith’s threat was coupled with an offer to acquire Zellerbach, which owns or controls about 2 million acres of prime U.S. timberland, for at least $1.13 billion, or $41.625 a share. Goldsmith hasn’t yet revealed any detailed plans for Zellerbach, but company officials fear Zellerbach’s fate would be similar to Diamond’s.

In a sharply worded statement, the company defiantly vowed that it wouldn’t be “hurried, bullied or intimidated.” Earlier, Zellerbach Chairman and Chief Executive William T. Creson insisted that the company wouldn’t buy back Goldsmith’s shares at a premium, a practice known in the mergers-and-acquisitions game as paying “greenmail.”

Last year, a group headed by Goldsmith won a $50-million premium when it sold its 9% stake in St. Regis Corp. back to the company; St. Regis was later acquired by Champion International. Other forest-products companies also have been taken over by investors seeking undervalued assets.

In its attempt to avoid a similar fate, Zellerbach has hired some of the biggest guns in the mergers-and-acquisitions field--including lawyer Martin Lipton, investment banker Salomon Bros. Inc. and public relations man Gershon Kekst--to orchestrate its defense.

The showdown between Goldsmith and Zellerbach is shaping up as a “battle royale,” says George B. Adler, first vice president and a forest-products analyst for Smith Barney, Harris Upham & Co. Adler thinks that Goldsmith’s bid has put Zellerbach up for grabs--or “into play” in takeover parlance--and that the company will eventually be sold for more than $50 a share.

“There are already buyers lined up for various parts of Crown Zellerbach,” Adler says.

Goldsmith, a flamboyant financier whose career began at the age of 20 when he paid $200 for the rights to peddle a British rheumatism cream in his native France, can be a tenacious opponent. It took him more than two years to wear down Diamond International. His global financial empire includes the French news weekly L’Express, oil reserves in Guatemala and a 40% interest in the Aspinall gambling casinos in Britain.

His biggest holdings in the U.S. are Grand Union, an East Coast supermarket chain, and about 1.7 million acres of timberland that remained after he took Diamond International apart and sold off its various divisions.

Zellerbach, his latest target, is a once-sluggish company that has undergone radical surgery of its own since Creson moved up to the top spot more than three years ago.

Pared Product Line

Under Creson, Zellerbach has lopped off 9,000 of 28,000 employees, sold its money-losing Canadian operations and pumped $800 million into desperately needed mill modernizations. The company also has negotiated productivity improvements and long-term labor peace in five- and six-year union contracts.

Creson also pruned Zellerbach’s product line to eliminate such low-margin commodities as newsprint, pulp and kraft paper, which is used to make brown paper bags.

The 55-year-old executive also de-emphasized timber and wood products and poured resources into pursuing more lucrative markets for white business papers, coated printing papers and towel and tissue products.

(Zellerbach’s brands, which include Marina and Chiffon toilet paper, Nice ‘n Soft tissues and Spill Mate paper towels, have the largest market share in the West Coast towel and tissue market.)

And, in an attempt to capitalize on the $5-billion market for computer and office-automation supplies and accessories, Creson in 1983 formed a new unit called Eczel Corp. to distribute ribbons, floppy disks, print wheels, cables, modems and computer furniture.

The business, an outgrowth of Zellerbach’s longstanding role as a supplier of papers for business forms and computer printouts, has long-term potential but resulted in a hefty $19 million in start-up costs last year.

Despite Creson’s strategic initiative, the company’s earnings have remained lackluster. Zellerbach posted net income of $86.9 million, or $2.61 a share, in 1984, down slightly from a year earlier, as improved earnings from paper, container, specialty packaging and distribution operations were offset by depressed conditions in the timber and wood industry.

Analysts say Creson inherited a company that had been severely weakened by years of mismanagement. His predecessor, C. R. Dahl, who retired in 1981 at the age of 60, skimped on capital improvements and left Zellerbach saddled with some of the most antiquated mills in the industry, critics say.

One of Creson’s first acts was to get the board to slash the dividend on common stock in order to divert cash toward capital spending. The dividend was cut 57% to a $1-a-share annual rate from the previous $2.30. Though it served its purpose, the move made Zellerbach shareholders restive and added to the company’s vulnerability to a hostile takeover.

Ironically, Creson’s radical makeover of the company may have made Zellerbach a more tempting target for corporate raiders.

“My surmise is that the likes of Sir James recognize that most of the major surgery has taken place and that the company’s earnings potential is in place,” says one source close to Creson.

Creson himself declined requests for an interview. But, in a speech last month, he said, “Any external effort at this stage of our strategic program to capture our undervalued assets at the expense of greater future opportunities is a distinct disservice which may deny our shareholders the chance to realize the full value this company offers.”

Elaborating on that sentiment, a Zellerbach strategist contends that “if a raider were to take over the place and break it up and sell it off, he’d have to do it at forced-sale prices. . . . A raider using junk bonds and paying high interest rates wouldn’t have the staying power to hold out for top dollar.” (Junk bonds are a form of high-yielding debt that is generally used to finance more risky ventures.)

Zellerbach, on the other hand, has had 700,000 acres of “non-strategic” trees up for sale for 18 months now. “We’re not under pressure to sell at any price,” the strategist said.

Goldsmith is seeking Zellerbach at a time when the paper industry may be on an upswing.

Prices for white business paper peaked at $785 a ton last year before dropping to their current level of $620 a ton. Although demand remained high while the price was falling, the strong dollar gave foreign producers a cost advantage and they flooded the U.S. market.

‘Disaster Area’

That’s changing. In the past month, the dollar has lost about 10% of its value when measured against other major currencies. International Paper just posted a $60-a-ton price increase for white paper, effective May 1, and industry insiders are cautiously optimistic that the price hike will stick.

Timber and forest products “remain a disaster area,” a Zellerbach official said. The company has shifted almost all of its lumber production from the high-wage Pacific Northwest to the Southeast, where raw materials also cost less. One exception: a small pilot mill in Warrenton, Ore., that is cutting lumber to metric sizes for export to Pacific Rim nations.

And, while Zellerbach has invested over $425 million to modernize its sprawling Camas, Wash., paper mill, analysts say the company must invest at least another $1.5 billion to upgrade its other major installations.

With these challenges, the last thing Zellerbach’s officials need is a distracting takeover battle. Zellerbach is hoping to convince shareholders that current management offers them the best chance for the long-term appreciation of their investments.

They also are apparently counting on the shareholder rights poison pill to ward off Goldsmith and others, but takeover experts say that’s no sure bet. The rights give Zellerbach holders the ability to buy two shares of the surviving company after a hostile takeover for the price of one.

Might Zellerbach seek a “white knight” friendly takeover if its posion-pill defense fails? Zellerbach’s officials say they’re not looking for one. But if they decide to, Sir James Goldsmith has one in mind.

“I’m white,” the corporate raider recently quipped, “and I’m a knight.”