Smurfit clears bankruptcy hurdle, showdown looming

* Judge approves Smurfit's disclosure statement

* Hearing suggests company faces tough confirmation

* Confirmation fight to turn on company's value

By Tom Hals

WILMINGTON, Del., Jan 29 (Reuters) - Smurfit Stone Container Corp SSCCQ.PK received bankruptcy court approval on Friday to put its reorganization plan to a vote by creditors, setting up a showdown with shareholders who will be wiped out in the restructuring.

Smurfit, a leading recycler of paper and maker of paper packaging, overcame or resolved 28 objections to its disclosure statement, which it must provide to creditors along with its proposed plan.

Many of the creditors have indicated they favor the reorganization.

The most vigorous objections came from shareholders and their arguments indicated the company could face a drawn-out fight to confirm its plan.

Attorneys for two groups of shareholders attacked what they considered a lack of information about how Smurfit valued the company and the timeliness of the information that was used.

"On the central issue of this case, which is valuation, this is as clear as mud," said Rachel C. Strickland, whose firm, Willkie Farr & Gallagher, represents two funds that hold preferred stock.

Shareholders believe the company is underestimating its value and therefore wrongly denying them a recovery.

Smurfit disclosed this week a study done by the investment bank Lazard that estimated there was up to $3.3 billion that could be distributed to Smurfit claimants.

The company has proposed paying $1.4 billion in cash to secured creditors and swapping its equity for bond debt.

Judge Brendan Shannon said that many of shareholders' concerns relating to the company's estimated value would be addressed during the discovery process leading up to the confirmation hearing, which is scheduled to start on April 14.

"You will have the opportunity to sit in a room with the Lazard guy and beat him like a rented mule," Shannon told Strickland.

Holding up the disclosure statement, which runs hundreds of pages, Shannon called it "impenetrable" but said it met the legal requirements of disclosure.

Daniel Zinman, an attorney for Kasowitz, Benson, Torres & Friedman, which represents holders of common stock, noted that prices for the company's securities suggested a higher valuation than Smurfit's estimate.

"There's a huge disconnect between the number here (in the disclosure statement) and the market. If the market's wrong, the debtor must not be disclosing something," he said.

Strickland also questioned why the disclosure statement contained provisions about change of control and wanted the company to disclose if it had discussions with a potential buyer.

"There's enough quacking in this disclosure statement to make us wonder if there is a duck underneath," she said.

The hearing also gave parties affected by the closing of plants in Missoula, Montana, and Ontonagon, Michigan, a chance to plead for more information about efforts to keep the mills open.

Brian Schweitzer, the governor of Montana, had written the court to vent his frustrations over Smurfit's lack of disclosure about its plant in Montana. Smurfit buys 80 percent of the 2.5 million tons residual wood material produced annually in the state, according to Schweitzer.

Shannon asked for an update from Smurfit on its plans for finding an alternative to shutting the two mills, but denied requests for more information in the disclosure statement.

The company filed for bankruptcy a year ago after a sharp rise in raw material costs coincided with a drop in demand and tight credit markets.

The company's stock was up 15 percent at 22 cents per share in pink sheet trading near the end of trade.

The case is In re Smurfit Stone Container Corp, U.S. Bankruptcy Court, District of Delaware, No. 09-10235. (Editing by Gary Hill)