How to Make a Buck

In Manhattan last week, a check for $143,027,000 was handed to Robert M. Littlejohn, War Assets Administrator. It was the final payment on the most favorable war-surplus deal the Government had ever made, and it closed the books on the long, acrimonious controversy over disposal of the Big Inch pipelines.

In return for the check, Reginald H. Hargrove,* president of the Texas Eastern Transmission Corp., got title to the 1,254-mile, 24-in. Big Inch, and the longer (1,479-mile) but smaller (20-in.) Little Big Inch. Through them, Texas Eastern soon hopes to be pumping 433 million cubic feet of natural gas a day from Texas to the fuel-pinched Northeast.

The nimble way in which upstart Texas Eastern had jumped overnight into the first rank of U.S. public utilities impressed Wall Streeters. But what really made their eyes pop was the way Manhattan's Dillon, Read & Co. Inc. had handled the financing--and thereby reaped fat paper profits for itself and the promoters of Texas Eastern.

Gleam. Texas Eastern had begun as a gleam in the eyes of E. Holley Poe, an Oklahoma-born gas consultant; Everette Lee De Golyer, Texas' famed oil geologist ; Charles I. Francis, a Houston lawyer, and Houston's shipyard-building brothers, George and Herman Brown (TIME, Feb. 24). They advanced some $250,000 (later repaid by the company) in the early stages of engineering, planning and bidding. When down payments totaling $5,100,000 had to be made to the War Assets Administration, Dillon, Read's help was sought. Dillon, Read & Co., with the Browns, et al, lent Texas Eastern $1,350,000 (which they have gotten back) and brought in Reginald Hargrove, a veteran United Gas Corp. executive. Among themselves the founders and Dillon, Read divided 150,000 shares of common stock. They paid $1 a share for it and split it into 1,050,000 shares.

Next Dillon, Read raised $120 million by selling 3 1/2% 15-year bonds to twelve of the nation's biggest insurance companies. Last week, Dillon, Read put on sale 3,564,000 additional shares of common stock at $9.50 each. The founders held on to their own 1,050,000 shares, which had cost them a little over 14-c- each. The new issue was quickly sold out. (The Browns themselves bought 100,000 shares.) Part of the proceeds of the stocks and bonds were used to pay off WAA.

Scheme. Thus the founders already had a $9,825,000 paper profit on their $150,000 investment in Texas Eastern stock. The Brown brothers had made $2,800,000 in paper profits on their initial investment for stock of $42,750. They would net another $500,000 or so in profits, at cost plus, in constructing 21 compressor stations along the Inches. Geologist De Golyer's paper net was $1,000,000 on a $15,000 investment, Holley Poe's was $712,000 on $10,000. As for the eleven partners of Dillon, Read & Co., their $18,750 investment had grown into $1.2 paper millions. They would also net about $380,000 in underwriting fees and $200,000 for selling the bonds, bringing their total profit to $1,808,125. Most important, the original investors still kept at least 22.8% of the stock, which in most companies amounts to effective control.

Cream. Left-wingers, and others chronically suspicious of big profits, no matter how made, would doubtless see iniquity in the Texas Eastern deal. Others would see it as a classic case of venture capitalism in which everybody stood to make a profit.

For one thing, the Government, always suspicious of Wall Street, gladly approved the deal for sale of the Inches because it got back all but $2 million of the $145 million it had spent to build the pipelines. Moreover, the financial legerdemain had created something of benefit to the nation. By finding an outlet for Texas gas, the company would cut down the shocking waste of over 600 billion cubic feet of gas a year now "flared" at Texas and Louisiana oil wells.

And though investors had bought Texas Eastern shares at 67 times the price promoters had paid for their shares, they bought no pig in a poke. With contracts already signed to buy gas at an average cost of 7.6-c- per million cubic feet, and sell all it could deliver at an average price of 26.7-c-, Texas Eastern's backers confidently expect to gross $30 to $40 million a year. If they do, they expect that more than half will be operating profit.

* No kin to the famed ex-Private Hargrove.

This file is automatically generated by a robot program, so reader's discretion is required.