Days numbered for Doman
A recent deal that will see a change in control of BC forest giant Doman Industries marks the end of an era; it was a sad day for company founder, legendary Vancouver Island lumberman Herb Doman.
By Gordon Hamilton
After 18 months of searching for a white knight, Doman Industries Ltd has agreed to the inevitable—turning control of the bankrupt BC forest giant over to a group of bondholders headed by Brascan Financial Corporation, an Ontario-based asset management company. The deal announced in late April by Doman begins the closing chapter to a company founded by legendary Vancouver Island lumberman Herb Doman, who described the end as a dark day. “You build a company from age 12 to where it is today, a fullyintegrated lumber company. There is no other company fully integrated from stump to consumer,” said the company chairman in an interview from his home in the Cowichan Valley on Vancouver Island. “Whoever has done this certainly didn’t have my support or approval.” The end of Doman underscores more than the dissolution of a forest industry giant; in the process, the Doman family has been split.
Son Rick, now president of Doman, believes the restructuring proposal will result in a strong—although changed—company. He said he has been offered a seat on the new board and the position of chief executive officer in the new company. But what Brascan intends to do with the forest company remains uncertain. Are the new owners interested in operating it, or keeping it for six months in the hopes of a softwood lumber deal and then selling it in pieces for more money? “In my view, in dealing with the people at Brascan, I think they are in this for the long term,” said Rick Doman. “They want to set up the new Doman as a company that focuses on the solid-wood sector but would retain ownership of the Squamish pulp mill.” This company-owned pulp mill is just up the coast from Vancouver. Doman said he thinks a new name for the company “may be considered,” when the restructuring is completed.
But not everyone agrees. “My guess is that they are basically in this for a quick financial return,” said industry analyst Kevin Mason, of Equity Research Associates. “At the end of the day, it looks like Doman has come back to the first partner they had.They have basically determined the path they are going to walk,” said Mason of the deal. He added Brascan’s timing is impeccable. Lumber markets are strong, pulp prices are rising and investors are bullish on forest company stocks. “Brascan is coming out of the gate with all the stars aligned.” He said if the bondholders want to sell, coastal competitor Interfor could end up owning some of the Doman assets. “Interfor is a very important player as this whole thing unfolds. Interfor is still one of the key people Brascan will have to deal with.” Interfor made its own proposal to acquire the company in March but it was rejected by the bondholders.
The first casualty of the restructuring is expected to be the Port Alice pulp mill on northern Vancouver Island. According to documents filed in court, the mill has lost $25 million since the company sought creditor protection. Although four potential investors have reportedly conducted due diligence on the mill, Mason said he would be surprised if it ever starts up again. “I have a tough time believing there is any real interest in the mill if they have been producing losses like that.” BC Forests Minister Mike De Jong said work is still underway to keep the Port Alice mill operating. “There’s great determination in Port Alice, from the mayor on through the entire town, and I think it’s a bit early to, in any way, shape or form, write off Port Alice.”
De Jong said the government is looking at developing a community forest licence to allow the town to determine what the mill’s fibre is going to be used for. Rick Doman said he believes there is a good chance the mill can be sold, providing the potential buyers can be assured a fibre supply. The bondholders do not want the pulp mill operating because of the potential liability any owner faces over environmental clean-up. The bill could go as high as $100 million, Mason said. The pulp mill is the main employer in the town of Port Alice and its closure will hit the town hard. The population has already dropped from 1,200 to 800 during the time Doman has been under court protection.
Mason said the decision to close the mill will save Brascan from liability down the road. To refinance Doman, the bondholder group intends to issue about $200 million in new bonds to pay off secured bondholders and swap $513 million US of the unsecured bonds for equity in the new company. Rick Doman said the outcome is not what he wanted but that he believes it is best for the company and the employees. “The bottom line is, we could not absorb $713 million US in debt and operate on a restructured basis.” The deal Doman and its unsecured bondholders reached is bound to shake up the coastal forest industry, lead to one more Vancouver Island mill town shutting down, and leave the founding Doman family with potentially no equity.
The Duncan-based company, with six sawmills, two pulp mills and 3,200 employees mostly on Vancouver Island, is to be split into two new companies, dubbed Lumberco and Pulpco. Pulpco will be owned by Lumberco. The company was founded in 1955 as a one-truck hauling operation by Herb Doman, son of Sikh immigrants. Doman built it into a forest empire with revenues of $750 million. But he ran into problems in 1998, when he bought lumber and timber assets from Pacific Forest Products, expanding and taking on new debt just before the coastal forestry crash. In 2000, son Rick stepped in as president after Herb Doman suffered a stroke.
Brascan, which had been acquiring Doman bonds through subsidiary Tricap Restructuring Fund, first presented a plan to Rick Doman in 2001, and then when Doman sought creditor protection from the BC Supreme Court in November, 2002, presented its plan again. By then, Doman had defaulted on some of its $1-billion debt. For 18 months, the company tried to find an alternative but no acceptable proposal to refinance the company developed, forcing the unsecured bondholders—who initially viewed the Brascan proposal as a fall-back plan in the event refinancing did not work out—to work more closely with Brascan.
In April, Doman announced it had accepted a slightly modified version of the unsecured bondholders’ plan. “It’s a sad day,” said Laurie Cater, publisher of Madison’s Canadian Lumber Reporter. “It’s an over-worked phrase, but this really is the end of an era. I always hoped they would survive, but lately it’s become apparent that wasn’t going to happen.”
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