Business: Corporations

Last week the following newsworthy corporations made the following news:

Tobacco Annuity. In 1923 Tobacco Products was a $70,000,000 Virginia corporation with 20 well-advertised brand names, including Herbert Tareyton, Johnnie Walker, Melachrino. Today Tobacco Products is one of the so-called Morrow-interests, and its principal asset is a wad of stock in United Cigar Stores, which is in the hands of the courts.

In the intervening years American Tobacco (Lucky Strikes) purchased the manufacturing facilities of Tobacco Products but instead of buying the valuable good-will tied up in the brand names it leased them for 99 years at an annual rental of $2,500,000. American Tobacco, however, has an option to buy the brands at any time, and last week it was reported that President George Washington Hill was planning to do just that.

The price Mr. Hill will have to pay under the provisions of the lease is the value of a $2,500,000 annuity on a 7% basis for 88 years. Calculated by that involved mathematical formula, the price is about $35,000,000.

The reason Mr. Hill might be willing to pay a cool $35,000,000 to commute his lease is that he can now borrow from the banks at ridiculously low rates. Even if he did not choose to use any of the $32,000,000 cash he had on hand at the start of last year, interest charges on the whole sum would probably amount to less than $1,500,000, leaving him a round $1,000,000 to the good each year.

The other beneficiaries of Mr. Hill’s move would be the bondholders of Tobacco Products Corp. of New Jersey, a. subsidiary of the parent Morrow company. The American Tobacco lease is pledged as collateral for the bonds, which were issued in a reorganization several years ago. Outstanding in practically the same amount as the theoretical value of the lease, the bonds become due & payable the instant Mr. Hill takes up his option.

G. E. Teaser. When the directors of General Electric Co. sat down in Manhattan last week for their regular monthly meeting, they had before them a teasing corporate conundrum. What could their company do with $60,900,000 cash and $50,976,000 in marketable securities on the last financial statement? It did not take a director to see that 1) in the present cheap money market G. E. could not earn enough on cash and Governments to offset what it has to pay out in fixed dividends on special stock and interest on bonds, and 2) that no new orders for electrical equipment were so large as to call for heavy outlays of the company’s cash in the near future. Therefore the directors hiked up their chairs and decided upon a course they had all contemplated for some time.

They ran their fingers down the fat sums on General Electric’s fat financial statement until they came to the figure $42,900,000, representing Genenal Electric’s 4,292,964 shares of 6% cumulative special stock at par ($10). A little farther down the list they came upon the figure $2,047,000. representing G. E.’s sole remaining bond issue. Thereupon they voted to use their surplus cash to retire the bonds at $105 and the special stock at $11. G. E. special, issued in 1922-26 as a stock dividend on the common, will be retired by April 15, 1935, the bonds later in the year. Total saving in dividends and interest: $2,646,000.

Equitable Allegheny. The financial difficulties of Alleghany Corp., big Van Sweringen rail holding company, made news last spring when O. P. Van Sweringen evolved a plan to head off default on its 5% bonds of 1950. His plan hung fire for nine months. Nearly everybody but bankers and Alleghany bondholders had forgotten what it was when last week the plan was approved by a Federal Court in Baltimore, where Alleghany had applied for permission to reorganize under Section 77-B of the Bankruptcy Act. Judge W. Calvin Chestnut agreed that since Alleghany did not have the cash to continue paying interest it was “fair and equitable” for the Van Sweringens to prepay five years’ advance interest in convertible preferred stock, and allow bondholders to convert each $1,000 bond into 100 shares of common stock. With 77% of the bondholders in favor of the plan, Judge Chestnut ignored a vociferous minority of one-half of 1% who wanted the Van Sweringens ousted, a trustee appointed.