Anatomy of a Big Deal

It was quite a deal. At one point or another, it involved several of the biggest U.S. industrialists, a few of Manhattan's storied financial institutions and a former U.S. Secretary of the Treasury. It stretched across basic industries--coal, oil, mining and automobiles. Even to experts, it was dazzling in its complexity, yet beautiful in its money-making simplicity. All this loomed behind the seemingly ordinary announcement last week that Manhattan's Continental Oil Co. (1964 sales: $1.4 billion) had agreed to acquire Pittsburgh's $305 million Consolidation Coal Co.

Toward "Total Energy." Consolidation Coal Chairman George Love and Continental Oil Chairman Leonard McCollum had often talked about the desirability of a hookup among the nation's basic and hotly competitive fuels: coal, oil and natural gas. The two men are old pals in business and personal life. Love is also chairman of Chrysler Corp., of which McCollum is a director. They met frequently, a year ago talked business on a Mediterranean cruise aboard the private yacht of Daniel Keith Ludwig, the world's largest shipping operator. Says Love of his plans with McCollum for a merger of coal and oil: "You might say that this total-energy complex is a dream we've had for a long time."

Last year Love tried to achieve the dream in a different way: Consolidation Coal joined with Allied Chemical and Wall Street's Loeb, Rhoades in an attempt to buy Pure Oil Co. After that attempt failed, Love turned to old friend McCollum, negotiated to sell his coal company to Continental Oil, the nation's eighth-largest oil and natural-gas company, whose products are known to motorists as "Conoco." This prospect appealed to Love partly because he hankers to spend more time managing Chrysler Corp., 7.3% of whose stock is owned by Consolidation Coal. Though Chrysler is well run by its operating chief, President Lynn Townsend, it could use more of Love's financial attention; because its auto sales have been so good, it now needs money to finance a $1 billion, two-year growth program. Recently the Chrysler board voted to postpone Chairman Love's retirement, which had been scheduled for Oct. 1, just after he turned 65.

Worth More Dead. A coal-oil tie also made good sense to another key personality: onetime (1953-57) Treasury Secretary George Humphrey, who formed Pittsburgh's Consolidation Coal in the mid-1940s and put Love in charge. Humphrey controls Cleveland's M. A. Hanna Co., a $609 million holding company that owns 15% of Consolidation Coal. Two weeks ago, M. A. Hanna announced that it would go out of business, distribute to its shareholders its huge holdings in Consolidation Coal, National Steel and Hanna Mining. One reason for the liquidation: George Humphrey, though still active at 75, is wearying a bit, would not mind slowing down.

Anyway, M. A. Hanna is worth more dead than alive. Its stock had been selling for much less than its asset value, rose by more than 20% after the announcement that the assets will be distributed. Those assets will be worth even more when Consolidation Coal becomes a subsidiary of Continental Oil --thanks to a neat shuffle worked out by Love and McCollum, with at least Humphrey's blessing.

The holders of Consolidation Coal stock, which was selling for about $50 a share, will receive a total of $75 a share in the deal. First, the coal company will distribute its Chrysler holdings --which cost it only $45 million but are now worth $191 million--to Consolidation shareholders. In addition, Continental Oil will give the coal company shareholders $148 million in Continental stock, plus $460 million in cash against future coal production. It therefore appears on the surface that Continental will have to pay $608 million for the coal company. In fact, it will lay out only $48 million.

Continental w111 immediately pick up $100 million in working capital now held by the coal company; that will have the effect of reducing Continentals 148 million stock payout to only $48 million. As for the "future" payout of $460 million, that will be financed by a Wall Street syndicate or other big lenders so that the coal shareholders will get their cash immediately. Continental should be able to liquidate that loan within ten years from the coal company's earnings and depreciation. Meanwhile, it can deduct the annual interest on the loan--some $27 million--from its taxable income. Judged by Consolidation Coal's recent rate of profits, the acquisition should give Continental Oil some $12 million a year in after-tax earnings, or a 25% return on its $48 million investment.

Double Windfall. If shareholders and the Justice Department approve, Continental Oil will thus upgrade its earnings, get $100 million to develop its coal and oil properties, also vastly expand a diversification move that since 1962 has led it into plastics and fertilizers. The shareholders of Consolidation Coal w111 get what amounts to 50% increase in the value of their investments. And the shareholders of M. A. Hanna will enjoy a double windfall because both Hanna and its holdings in Consolidation Coal have suddenly become more valuable. The dreams of Messrs Love, McCollum and Humphrey have produced one of those arrangements that, while rare in politics and impossible in sports, do happen in U.S. business: everybody stands to come out on top.

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