INVESTMENT TRUSTS: Cola Coup

Most investment trusts buy securities that they expect to pay dividends and increase in price, and then wait for their hopes to come true. Manhattan’s Phoenix Securities Corp., run by a group of hard-headed businessmen (its chairman, bald Wallace Groves, is under indictment in a mail fraud case not connected with Phoenix), favors another technique. It often looks up an anemic corporation, gives it a financial blood transfusion and an infusion of hardheaded management and takes its fee in the form of options on shares that prove valuable if the treatment is a success.

In its last semiannual report (to February 28) Phoenix listed investments with a book value of $6,481,682, and unctuously noted the information that their market value was $5,976,867 greater. Last week Phoenix’ president gave out some information indicating that it soon might have an even more unctuous note.

Three years ago Phoenix became interested in Loft, Inc., a $10,000,000 Manhattan candy-&-restaurant chain. It lent Loft some $600,000. It also dug into its strongbox for collateral on which Loft borrowed another $400,000 in bank loans, further backed up by Phoenix’ endorsement. For such help in a crisis Phoenix got options on 300,000 shares of Loft at $1.50, on 200,000 shares additional at $2. But since Loft had lost money every year since 1934 this did not look like too promising an investment. Last year Loft stock got down to 75½ a share and its operating loss was $946,151. Meanwhile, with the aid of the money Phoenix put up, Loft waged a lawsuit.

Its suit was against its onetime president, jut-jawed Charles Godfrey Guth, who in 1931 had bought for his own account a controlling interest in, Pepsi-Cola Co., a puny contender in the soft-drink market (annual sales about $33,000). By whirlwind promotion, including sales in Loft’s

200 stores, President Guth fizzed up its sales until by the end of 1935 he was able to report a net for the year of $464,000. Loft filed suit for his 237,500 shares (91%) of Pepsi-Cola stock, contending that it had been bought with Loft money, developed with Loft resources.

Last year, Delaware’s Court of Chancery finally decided that Pepsi-Cola belonged to Loft, not to Mr. Guth. Then Phoenix’ president, 43-year-old Walter S. Mack Jr., a director of Loft, became president of Pepsi-Cola Co. When he looked into the books which Mr. Guth had previously kept well hidden, he found a thriving business. For the first nine months of 1938 Pepsi-Cola had turned in a net profit of $2,700,000; its stock was selling at $70 a share (it is now $190). (For the same period Loft lost $867,000.)

Meantime Pepsi-Cola had become the No. 2 cola drink of the U. S. (next to Coca-Cola). For the first six months of 1939 Pepsi-Cola had turned a net profit of $2,500,000, an increase of 76% over its booming 1938 figures. Last week President Mack ventured to say that for the first eight months of this year net profits would pass record 1938 (when the net was $3,240,000). Still selling far below big Coca’s bottle volume (the trade’s best guess: 18-25% of it), Pepsi-Cola’s twelve-ounce bottles (Coca-Cola: six ounces) have done best in New York City. In its first full-page newspaper ads fortnight ago, Pepsi-Cola announced it had outsold “any other Cola drink in bottles” by more than 50% in the metropolitan district, had outrun, in fact, all the “Cola” drinks, of which there are some 35 in New York alone.

War may take some of the profit out of Pepsi-Cola by boosting the price of sugar (considerably more of it goes into its double-sized bottle than into a bottle of Coca-Cola). But it will have to be a long war. Last month, with a year’s supply on hand or under contract, Pepsi-Cola extended its war hedge, contracted for a full three-year supply. Meanwhile, there has been no indication that Loft’s restaurant chain has ceased to lose money. But, with Loft stock selling as high as 16 5/8 even in last week’s war-depressed market, Phoenix had $6,000,000 paper profit on its options.