tion of proxies needed to effectuate the merger (to be discussed more fully hereinafter). Based on these data, the common stock of Southern as at June 30, 1948 had a per share book equity of $19.40 on a corporate basis and $21.18 per share on a consolidated basis. ' The per share earnings of Southern applicable to its common stock for the twelve months ending June 30, 1948 were $2.48 and $2.85 per share on a corporate and consolidated basis, respectively. The record further indicates that for the calendar years 1946 and 1947 the per share earnings of Southern on a corporate basis were $2.25 and $2.29, respectively, and on a consolidated basis these figures were $2.44 and $2.66, respectively." CONCLUSIONS: (a) Treatment of security holders affected by proposed transactions: The persons primarily affected by the proposed merger are Southern, as owner of all the common stock of Alabama, and the minority holders of the common stock of Birmingham." As has been hereinbefore indicated, the proposed merger will effect at least a temporary dilution of the per share earnings applicable to the common stock of Birmingham. Based 9 The market prices of Southern's common stock for the period indicated were as follows: 10 The common stock per share dividend record of Southern for the past several years is as follows: "The bonds, notes, and preferred stock of Birmingham are being affected by the proposed transactions. The proposed change in the bond indenture has been expressly accepted by Northwestern Mutual Life Insurance Company, the owner of all of Birmingham's outstanding bonds. The notes of Birmingham are being refinanced by Merged Company with the concurrence of the holders of said notes. The increased equity cushion resulting from the acquisition of Alabama together with increased earnings are of obvious benefit to Birmingham's preferred stock. on the data in the record and summarized above, it appears that the estimated per share earnings of Birmingham of approximately $1.25 will, immediately upon consummation of the merger, become approximately $1 per share. The record indicates, however, that the earnings of Alabama have, over the past several years, been more stable than the earnings of Birmingham. This is largely attributable to the differing characteristics of the separate territories served by each company. Under such circumstances the merger should result in somewhat more stable earnings applicable to the common stock of Merged Company than presently is the case with respect to earnings applicable to Birmingham's common stock. Moreover, as noted previously, Merged Company, will have a substantially stronger common stock equity (26.4% as compared with 41.3%) and will be in a much more favorable position to obtain funds needed for construction. We conclude under all the circumstances of this case that the cash offer of 90 per share to all persons retaining their present holdings of Birmingham's common stock constitutes fair compensation for any dilution of their interests resulting from the merger. The following tabulation, based on figures as at June 30, 1948, compares one share of Southern with two shares of Birmingham (on the assumption the merger is effected) with respect to corporate and consolidated earnings of Southern and estimated earnings of Birmingham, dividends currently paid, and underlying book equity: " *This comparison does not take into account the 90 per share Southern is offering the Birmingham stockholders who do not elect to accept the exchange. As the foregoing table indicates, a person making the exchange will receive a security on which current dividends and applicable earnings are substantially higher than the securities surrendered. On the basis of the foregoing factors, we conclude that the exchange offer of Southern provides full compensation to all persons electing to make the exchange. In this connection we observe that if the exchange offer is accepted in its entirety, the public minority interest in Birmingham will be eliminated, a result consistent with the objectives of the Act. 12 From January 1, 1948 to August 30, 1948 Southern, pursuant to authorizations from the Commission, purchased a total of 1,597 shares of Birmingham's common stock at prices ranging from a low of $11 per share on June 1, 1948 to a high of $11.75 on January 30, 1948. The market price of this stock at September 23, 1948 (the day before the last public hearing herein and 13 days following the announcement of Southern's offer), with only a nominal market, was 11-1/2 bid and 13-1/2 asked. See footnote 9, page 768 supra for market prices of Southern. We also find that Southern's contribution to Merged Company and the cash payments, if any, to persons not electing to exchange are being adequately compensated for with new common stock of Merged Company. Accordingly, we find that the merger program provides appropriate treatment for the publicly held common stock of Birmingham, to Southern, and to all other security holders affected by the merger. (b) Proxy Material and Other Matters: It is represented that the merger may only be consummated if approved by the affirmative vote of two-thirds of the preferred and common stockholders of Birmingham and twothirds of the common stockholders of Alabama. Since the common stock of Alabama is entirely owned by Southern the voting of that stock requires no solicitation. In the case of Birmingham the company proposes to solicit proxies from both its preferred and common stockholders for votes with respect to the Merger. The solicitation material is to contain, among other things, a copy of this Findings and Opinion, certain financial data, including balance sheets and income statements of Southern, and a copy of the proposed charter of Merged Company. We have examined the solicitation material and make no adverse findings with respect thereto. The filing contains an estimate of $25,000 as fees and expenses applicable to the proposed transactions. These fees include $11,500 to White, Bradley, Arant & All, Birmingham, Alabama, as counsel for applicants-declarants and $1,000 to Cravath, Swaine & Moore, as counsel to one of the banks owning notes of Birmingham and Alabama. We have examined the details with respect to the nature and proposed allocation of such fees and expenses and conclude that they are not unreasonable. At the present time, Birmingham may not pay dividends on its common stock in excess of 60¢ per share or 50% of net income available for such dividends, whichever is the lesser amount. This restriction, originally imposed by this Commission in 1941 and modified to its present terms in 1944, was designed to build up the equity applicable to the common stock of Birmingham. As at December 31, 1940, the common stock equity of Birmingham was 13.26% of total capitalization. This ratio was 20.84% and 26.4% as at May 31, 1944 and June 30, 1948, respectively, and for Merged Company it becomes 41.3%. Under these circumstances and in view of the provision of the charter of Merged Company imposing the dividend restriction customarily required by us in corporate charters as protection for preferred stockholders, we consider it appropriate to grant the request of Birmingham that the restriction as modified by our order of 1944 be terminated. Our order will so provide. (c) Satisfaction of applicable statutory provisions: It is represented that the merger and the issue of the new common stock of Birmingham is subject to the jurisdiction of Alabama Public Service Commission. That Commission has issued an order expressly approving the acquisition by Birmingham of the assets of Alabama, the issuance of the new common stock in the name of Alabama Gas Corporation, the assumption of the mortgage bonds of Birmingham, the refinancing of the notes to banks, and the assumption of the preferred stock obligations of Birmingham. 13 Under these circumstances, we find these aspects of the instant filing satisfy the standards of Sections 6 (b) and 9 (b) of the Act. With respect to the alterations of the rights of the bondholders of Birmingham and the preferred stockholders of Birmingham, we conclude, for the reasons hereinbefore stated, that the declaration with respect thereto should be permitted to become effective, no basis for any adverse findings being established. As indicated previously, both Birmingham and Alabama are public utility companies incorporated and operating solely in the State of Alabama. Southern supplies practically all of the gas requirements of Alabama and approximately 54% of the gas requirements of Birmingham. It appears from the record that an increasing proportion of Birmingham's future gas requirements be obtained from Southern as Birmingham's existing coke oven gas contracts expire and its needs grow. The record also indicates some operating economies will result from the merger of the two companies and that the merged company will be better able to provide new capital for property additions than the two companies operating separately. Under the circumstances, we find that the proposed acquisition meets the standards of Section 10 of the Act including Section 10 (c) (2). We further find that the other applicable statutory standards are satisfied and that no adverse findings are required. In connection with the issuance of the new common stock by Southern, to be used in exchange for the publicly held common stock of Birmingham, Southern has requested that our order, or orders, recite that this undertaking is necessary or appropriate to the integration or simplification of the holding company system, of which Southern, Birmingham, and Alabama are members, and requests that such order, or orders, conform to the requirements of Sections 371 and 1808 (f) of the Internal Revenue Code, as amended, and contain the itemizations and specifications required by such sections. In view of the fact that these transactions look toward the elimination of the publicly held minority interest in Birmingham, we are of the opinion that this request is proper. Our order herein will so provide. An appropriate order will issue. 13 Order of Alabama Public Service Commission dated October 18, 1948. 302972 O-55-50 |