Dow Jones Newswires | Smurfit-Stone Container Corp. and
shareholders kicked off a bankruptcy-court contest Tuesday some $1
billion apart on what they believe the box maker will be worth when it
exits Chapter 11 protection.

The company says it’s worth $3.4 billion at most — not enough to cover
its debts. Shareholders put a $4.1 billion to $5 billion price tag on
Smurfit-Stone — enough, they say, to protect them from being stripped
of their holdings, as the company’s Chapter 11 plan proposes to do.

The calculations behind the plan came from company executives who should not be second-guessed by a court, Smurfit-Stone attorney Richard Kapnick of Sidley Austin said in U.S. Bankruptcy Court in Wilmington, Del.

Days of hearings are scheduled before Judge Brendan Shannon, who will ultimately decide on who’s right: Smurfit-Stone and its creditors or shareholders who are challenging the company’s Chapter 11 exit plan.

Smurfit-Stone wants to refinance bank loans and emerge from bankruptcy property of creditors, with an 8 percent slice of equity reserved for senior managers.

Shareholder attorney David Rosner pointed to “extraordinarily generous payments” to executives under the Chapter 11 plan, $200 million worth of value for people who agreed to hand the company over to creditors and cut shareholders out.

“It implies there could have been, let’s say, an exchange,” said Rosner, who’s with Kasowitz Benson Torres & Friedman.

Shareholders say Smurfit-Stone’s value calculations are fatally flawed because they rest on the experience of 2009, a year Smurfit-Stone spent in bankruptcy amid a deep global recession.

“This management team, frankly, is not experienced doing comprehensive mutliyear projections,” said Rachel Strickland of Willkie Farr & Gallagher, attorney for preferred shareholders.

Distressed-debt investors have been eying the action in Smurfit-Stone’s bankruptcy case, alerted to signs of returning health in the business. The company’s bonds will be converted into equity when Smurfit-Stone emerges from bankruptcy.

Prices on the bonds have risen steeply since Jan. 26, 2009, when Smurfit-Stone filed for Chapter 11. Bonds that were selling for 12 cents on the dollar at that time are now trading above 90 cents on the dollar.

Shareholders say rising bond prices are a sign sophisticated investors know Smurfit-Stone, which estimates the bondholder recovery is worth 71 percent  to 80.6 percent, undervalues itself for purposes of deciding who gets paid in Chapter 11 and who doesn’t.

Bondholders say the bond-trading levels signal the opposite. Investors have no faith they’ll be paid in full, with interest, or “par plus accrued,” said creditor attorney Gregory Horowitz of Kramer Levin Naftalis & Frankel. Unless creditors are made whole, with interest, shareholders get nothing.

“The bonds are trading at significantly less than par plus accrued,” Horowitz said, adding that’s “proof the market views this company as insolvent.”

If Shannon finds Smurfit-Stone is insolvent — that is, that its debts outweigh its value — the company’s Chapter 11 plan will be confirmed. If he finds it’s solvent, shareholders have a chance of holding on to some value.

The judge has ruled against the shareholders in the past when he refused to appoint an official committee to represent equity stakeholders in the big bankruptcy proceeding.

Shannon turned the investors down in part because shareholders including Mariner Investment Group LLC and Senator Investment Group LP had shown they could look out for themselves, without official committee status.

For the Chapter 11 confirmation fight, shareholders are counting on months of mounting evidence that supports their view of Smurfit-Stone as a company that hit bottom with the economy but that rebounding strongly.

The economy is coming back and renewed consumer spending is coming with it, raising the demand for Smurfit-Stone’s boxes at a time when the company has been able to hike prices, shareholders say.

With demand rising, inventory at a nearly 30-year low, and industry consolidation, Rosner said, Smurfit-Stone will enjoy a “monopolistic” industry atmosphere when it leaves court protection.

Smurfit-Stone idled and shuttered plants in Ontonagon, Mich., and Missoula, Mont., during its restructuring, saying they were too expensive to keep open.

According to industry analysts, such plant closures will help keep prices high.