STOCK PUTS FEDS IN ON B.A.T. DEAL KEATING SCRAMBLING TO REGAIN SHARES

Published on FRIDAY, July 28, 1989
© 1989 The Arizona Republic

Byline: BY MAX JARMAN, ABG STAFF WRITER, (C)Copyright 1989, Arizona Business Gazette

Charles H Keating Jr., the consummate deal-maker, may be locked out of one of the biggest deals in his life.

The embattled American Continental Corp. chairman could be forced to stand on the sidelines while the federal government nets a $400 million windfall from the biggest takeover in the history of European business: Sir James Goldsmith's $21.5 billion play for B.A.T. Industries.

Sir James' interests in the B.A.T. takeover are indirectly represented by General Oriental Investments Ltd., of which Keating owns, or did own, a 20 percent stake. The stock, however, was technically held by Lincoln Savings and now is in the hands of savings and loan regulators.

Sources close to the situation explain Goldsmith, through General Oriental, owns one third of The Anglo Group, which has set up Hoylake Bidding Co. to make the play for B.A.T. Other partners in The Anglo Group are international financiers Jacob Rothschild and Kerry Packer.

Should Goldsmith prove successful in his highly leveraged bid for the London-based tobacco, insurance and retailing giant, some experts believe he stands to make a profit in excess of $2 billion. They note the estimated $28.6 billion break-up value of B.A.T. is $7.1 billion more than Goldsmith's offer.

And much of that profit and the spoils of the takeover are expected to flow to General Oriental, Sir James' principal corporate umbrella. Sources speculate General Oriental's approximately $2.3 billion in assets could double as a result of the B.A.T. takeover, making Keating's existing $300 million stake in the company worth between $600 million and $700 million.

That's why Keating has been trying so hard to get the General Oriental stock back.

Keating and Goldsmith go back a long ways. Through Lincoln Savings and Loan, Keating helped Sir James in some of his most notorious U.S. corporate raids; among them, the $4.73 billion bid for Goodyear Tire & Rubber Co. in 1986 and the 1985 raid on Crown Zellerbach Corp. The stake in General Oriental stems from the eventual break-up of Crown Zellerbach's assets.

Keating has made a number of plays for the General Oriental stock for months, and each time he has come up empty-handed.

When he agreed to sell Lincoln Savings to the Spencer Scott Group in December, the deal allowed Keating to buy back Lincoln's 45 percent interest in the Phoenician and Crescent hotels, as well as the General Oriental stock. At the time, Keating was willing to pay $200 million for the stock.

When the Scott deal collapsed and Keating began talking with U.S. Rep. John Rousselot, R-Calif., negotiations again called for Keating to keep the hotels and the General Oriental stock.

But then the federal government refused to approve the Rousselot deal and placed Lincoln Savings in conservatorship. That put the General Oriental stock further out of reach.

Now Keating is trying to regain control of the stock by acquiring Amcor Funding Corp. Amcor is the Lincoln Savings subsidiary that holds the securities. Amcor also holds American Founders Life Insurance Co. and Fidelity Life Insurance Co.

Keating claims the $855.2 million-asset Amcor is essential to his Chapter 11 reorganization plan for American Continental. The plan calls for Keating to take the company private and repay approximately $380 million in debts over 14 years. ''Without it (Amcor) we can't go forward with the (reorganization) plan,'' said James Feder, American Continental's lead bankruptcy attorney.

Feder noted the company no longer seeks to recover the Phoenician and Crescent hotels.

When Keating announced his intention to seek Amcor, regulators quickly noted they were already in negotiations with Dallas-based Zlogar & Co. for the sale of the two Amcor insurance companies. American Continental said it still wanted the holding company, but despite the hardship it could go through with its reorganization without the insurance companies.

However, Kathleen Wood, a Federal Deposit Insurance Corp. attorney, noted American Continental was trying to unload the insurance companies before Lincoln was taken over by the FDIC on April 14.

American Continental sources, who declined to be identified, acknowledge it is Amcor's General Oriental stock Keating is after. They say he views the stock as the key to his financial future and speculate he is probably under tremendous pressure from Sir James to get the stock back from the government.

''I should think that situation would make Sir James very uncomfortable,'' said Leon Getz, an agent with a Vancouver stock transfer firm that represents General Oriental.

When reached in London, General Oriental officers would not comment about the situation. American Continental officials also declined to speak on the record about the company's relationship with Goldsmith.

Keith Seibold, the FDIC district manager in charge of Lincoln Savings, said the government was aware of the situation with Goldsmith, but he could not comment further.

According to the 1988 Current Biography yearbook, General Oriental is Goldsmith's principal corporate umbrella. The company is based on Grand Cayman Island, a British island between Jamaica and Cuba,where it is protected from capital gains taxes. The company is listed on the Vancouver Stock Exchange, but exchange officials note the stock is very closely held and rarely trades.

''There are bids but no asks,'' said a broker with Canarim Investments Corp., a Vancouver securities dealer. ''That means there are no sellers.''

General Oriental's six-month report dated Jan. 4 shows 141.7 million shares outstanding. Sir James' stake is thought to be well over 100 million shares, with Keating -- or Lincoln Savings -- holding about 30 million shares.

''They are virtually the only stockholders,'' the Canarim broker noted.

Market price for the stock is about $10 per share, although book value is about $16.60. Shares yield 5 percent.

Goldsmith has a pattern of breaking up the companies he takes over and selling off their assets. Usually he keeps the choicest assets -- the crown jewels -- for himself. In the past these have been put into General Oriental.

They include:

* Fifty-percent interest in Grand Union Stores, taken over by Goldsmith in 1973 and ranked in 1986 as the third-largest supermarket chain in the United States.

Grand Union recently was acquired in a Salomon Brothers-led leveraged buyout in which General Oriental received $142 million in cash and 25 percent of the acquisition company in exchange for half of its shares.

* About 1.6 million acres of U.S. timberland and an undetermined amount of cash stemming from the 1982 takeover of Diamond International Corp., which netted Goldsmith $500 million.

* About 1.9 million acres of U.S. timberland, approximately 25 lumber and paper mills and $90 million in cash from the 1985 takeover of Crown Zellerbach.

* About $400 million in cash and cash equivalents stemming from various transactions, including the 1986 play for Goodyear that netted Goldsmith a $93 million profit after the company agreed to buy out his 12.5 million-share stake for $619 million.

But the bid for B.A.T. Industries is Goldsmith's biggest challenge and many experts believe he will succeed. It is the largest takeover attempt ever in European business and the second-largest worldwide. Sir James' $21.5 billion offer stands behind the $25.1 billion takeover of RJR Nabisco Inc. by Kohlberg Kravis Roberts & Co. in 1988.

B.A.T. Industries is the largest non-utility company in Great Britain, with annual sales in the $27 billion range.

In America, B.A.T. owns Farmers Insurance Group, Brown & Williamson Tobacco Corp. and Appleton Papers Inc., the world's largest producer of carbonless paper. U.S. retailing interests include Marshall Field & Co., Saks Fifth Avenue and Ivey's department store chains, in addition to Breuner's, a chain of retail and rental furniture outlets.

In Great Britain, B.A.T. owns Allied Dunbar and Eagle Star insurance companies and controls worldwide tobacco interests through its Batco unit.

Goldsmith is proposing to finance the deal with cash and $17 billion in debt. To pay the interest on the debt, Sir James plans to sell off all of B.A.T.'s assets except its tobacco interests.