Nine years after it was acquired by Kennecott Copper Corp., Peabody Coal Co. is again an independent company - well, almost. It is now the property of six other companies.
After fighting a Federal Trade Commission order to divest itself of Peabody for nearly six years, Kennecott finally has disposed of Peabody, but a debate goes on about the commission's original opinion, the long battle Kennecott pursued unsuccessfully to overturn it, and the end result.
Peabody is now in the possession of a six-company consortium of some of the world's largest and richest corporations: Newmont Mining Corp., The Williams Companies, Bechtel Corp., The Williams Companies, Bechtel Corp., The Boeing Co., Fluor Corp., and Equitable Life Assurance Society of the U.S.
Although the owners - none of whom has more than a 27.5 per cent share of the new Peabody Holding Co. - insist their intention is to let Peabody operate as a "strong, viable and independent coal company," some have questioned whether the public interest is any better served by having Peabody in their hands than it was in the hands f Kennecott.
The questions persist: Was the FTC wrong initially? Should it have reconsidered its decision ordering Peabody sold once the coal industry appeared to be changing and the "alarming" trend toward concentration that the agency had seen earlier appeared to be abating? Were the consortium's owners "potential entrants" into the coal business as Kennecott was found to be? Has the divestiture left Kennecott, sitting on a bundle of cash it has yet to do anything with, a prime takeover target?
The staff of the Senate Antitrust and Monopoly Subcommittee is looking into the nearly-decade-old case for its chairman, Edward M. Kennedy (D-Mass.), who promised Sen. Orrin G. Hatch (R-Utah) that he would do so. But no one expects the questions that have been raised to be answered in a manner that ends the debate or changes the outcome. "It's over and done with," says one antitrust lawyer. "The sale is already a fait accompli."
For an administrative agency proceeding - and for an antitrust case especially - the FTC complaint against Kennecott took a relatively short time. The FTC's final decision and divestiture order of May 1971 came just less than three years after the acquisition was challenged in 1968.
But Kennecott consumed the next six years fighting the decision - three years up to the Supreme Court, and three more after the court declined to revrse the commission. Kennecott formally divested itself of the disputed property on June 30.
Meanwhile, the market for coal - and energy generally - changed considerably, in large part because of the energy crisis of 1973. There has been a significant amount of new entry into the coal business by utilities and others seeking to make sure they have future and adequate supplies of a more abundant and cheap energy supply than oil.
This new entry has appeared - at least to some - to stem the "trend toward rising concentration" in the coal industry that the commission found prior to 1968 and felt constrained to halt "in its incipiency" by seeking to undo the Kennecott-Peabody merger. In addition, there has been a trend toward oil company ownership of coal resources that worries some far more than did Kennecott's ownership of Peabody.
In its 1971 decision, the FTC ruled that Kennecott's 1968 acquisition of Peabody violated the antitrust laws. The agency found that Kennecott, the nation's top copper producer, could have entered the coal business without buying out the top coal producer in the country. Instead, the purchase eliminated potential competition between the two in violation of Section 7 ot the Clayton Act.
Evidence at the trial was abundant on Kennecott's intentions with respect to the coal business. Kennecott had a considerable amount of cash to play with and was looking to diversify. Coal, an extractive industry not dissimilar to copper, looked good to many of the firm's officers. In 1965, Kennecott purchased Knight-Ideal Coal Co. of Utah. Documents submitted at the trial outlined Kennecott's plans to expand its operations in the business, using the coal not only as a captive energy source for its own operations, but also to produce and sell on a commercial basis.
Internal documents written by Kennecott executives discussed the company's plans and ability to become "a significant competitor for coal business" with annual sales of $100 to $200 million, a level which would have made it the third or fourth ranking firm in the industry. Kennecott was even perceived a potential entrant into coal by Peabody, which sought to deter its entrance into the business before it acceded to the acquisition.
"The record is clear that not only did Kennecott intend to enter the coal industry but also that it had the capacity to become a substantial competitor once it had entered," the unanimous commission said in an opinion by Everette MacIntyre.
"Instead of entering the industry by way of internal expansion or by toehold acquisition [by purchasing a smaller company to start with], however, Kennecott chose to acquire the leading company," MacIntyre wrote. "While Kennecott was able to enter the industry and thus add substantial competition, it eliminated this competition by acquiring Peabody."
Until the Kennecott decision, the "potential competitor" theory had only been applied in cases where the acquired firm was a leader in a tight oligopoly - an industry where eight or fewer firms supply 50 per cent of the market, with the largest firm having a 20 per cent or higher share.
But the commission said these circumstances were not "solely determinative" of whether an acquisition violated the law. The agency found high entry barriers and a rising trend toward concentration in the coal industry at the national level prior to the challenged acquisition, notwithstanding a steadily growing demand for coal.
The commission found that between 1954 and 1967, the year before the acquisition, the combined share of the top four coal producers rose from 15.8 to 29.2 per cent. During the same period, the top eight companies increased their share from 23.6 to 39.7 per cent. The leading companies also were growing at a much faster rate than was the total market.
"There is thus a trend toward rising concentration in the coal industry which, unless halted in its incipiency, may bring about very high concentration - in that industry - in the foreseeable future," the commission determined.
Hindsight, of course, makes judgments easier - and more accurate - than foresight. Although there is considerable dispute in academic and legal circles about whether the coal industry is more or less concentrated - it apparently depends which measures and which geographic areas are used - the dire future predicted by the commission failed to materialize.
In any event, in order to "remedy the probable anticompetitive effects of the unlawful acquisition," the agency found that "total divestiture of the acquired assets is both necessary and appropriate." It ordered Kennecott to divest "absolutely and in good faith" the Peabody properties within six months "so as to restore Peabody as a going concern and effective competitor in the mining, production and sale of coal."
Kennecott appealed the decision to the court of appeals, where it lost in September 1972, and then to the Supreme Court, where it lost in April 1974. It also filed unsuccessful petitions for reconsideration with the FTC and several petitions with appeals courts seeking delays in implementing the divestiture order or its reversal.
In late 1974, Kennecott began entertaining offers from prospective buyers who had the asking price - a minimum of $1 billion although the public market value was considered less than half that - but took no action to dispose of the company and still was pursuing its appeals last summer.
The company only appeared to throw in the towel a year ago after the FTC asked a federal appeals court to declare Kennecott in civil contempt for failing to comply with the court's 1972 judgment affirming the divestiture order, and to fine it $100,000 a day until it complied.
The agency also asked that members of Kennecott's board of directors be fined $1,000 a day until the divestiture took place. The only way to insure compliance with the FTC order was to impose substantial continuing fines for contempt because Kennecott continued to drag its feet and was accruing substantial profits from Peabody's operations, the FTC told the court.
According to a former FTC official, Kennecott, holding on to a property with a value ranging from $800 million to $1 billion, could shrug off a potential fine in the neighborhood of $3.5 million a year that would accrue with the agency's traditional $10,000-a-day penalties, but $36.5 million a year was something else again.
Although other groups had been interested in acquiring Peabody - including for a time the Tennessee Valley Authority - Kennecott announced in October that if it obtained permission from the FTC, it would sell Peabody for $1.2 billion in cash and securities to a five-company consortium (Boeing was added later). The price tag at the sale's consummation was $1.1 billion for Peabody's domestic properties, while its Australian operations were sold to a wholly owned subsidiary of the Broken Hill Proprietary Co., Ltd., of Australia for $100 million.
As it was constituted at the consummation of the sale, Newmont and Williams each have a 27.5 per cent share of the holding company, Bechtel and Boeing both have a 15 per cent share, Fluor has a 10 per cent share and Equitable has 5 per cent.
The composition of the group raised questions immediately in the minds of some antitrust lawyers and economists, but in a 61-page memorandum submitted to the commission in February, the owners of the proposed Peabody Holding Co. sought to assuage their concerns:
Although Newmont Mining, The Williams Companies, Bechtel, and Fluor had examined the coal business in the last few years, who hadn't, given recent events? they essentially asked.None of them had consummated any deals, and none of them could be considered "potential entrants" into the business the way Kennecott had been found to be, the group said.
Like Kennecott, Newmont is a large metal-mining company and is in fact the nation's fourth largest copper producer (Kennecott is the leader). Newmont also owns 3.9 per cent of the stock of Continental Oil Co., which in turn owns Consolidation Coal, the nation's second largest coal company. It also owns 8.2 per cent of the stock of St. Joe Minerals Corp., whose coal affiliate was the tenth largest coal producer in 1975, though it ranked 55th interms of reserves. Both holdings are for investment purposes only and are largely a residue of its former status as a closed-end investment company, the company contended. Newmont does not participate in the management of either, it added. Newmont also has a subsidiary, Dawn Mining, engaged in uranium production, but the company said sales amount to just a little more than 2 per cent of U.S. sales.
Fluor, Newmont and Williams all have oil and gas operations although they all contend they are "quite modest," especially compared to total industry production.
Williams operates an oil pipeline system from Oklahoma to North Dakota and Ohio, and Bechtel was party to a joint venture that proposed building and operating a cool slurry pipeline running from the Powder River Basin in Wyoming to Arkansas. But both the existing pipeline and the proposed pipeline would operate as a common carrier under the jurisdiction of the Interstate Commerce Commission, the memo noted.
The holding company also argued that the makeup of the consortium - with each having only a minority interest - militates against the possibility that any one of them would be in a position to dictate the policies of Peabody. It also contended that the proposed arrangement was more in the public interest than if Peabody had been sold to one company, which could liquidate the assets or alter the policies of the subsidiary if there was a decline in the fortunes of the parent.
"In short, the fact of divided ownership serves as firm protection against the possibility that Peabody Coal would be operated to serve any narrow special interests of the consortium, and instead acts to insure that Peabody will be operated as a coal company in its own best interests," they told the FTC.
Noting that each company was putting in between $20 and $75 million in cash to provide Peabody with equity capital in addition to their investments to buy the company, the holding company argued that each member "will be alert to protect its investment and will not countenance efforts by other members to limit Peabody's growth or to operate Peabody in a way designed simply to benefit, other lines of busines of one of the members of the consortium."
Last Monday, former Securities and Exchange Commission Chairman Roderick M. Hills took over as Peabody's new chairman and chief executive officer, with many in Washington believing his selection is a good sign. The 46-year-old lawyer says that he was asked to take on the job by two old friends, former labor and Treasury Secretary George P. Shultz, now president of Bechtel, and John H. Williams, chairman of the board of The Williams Companies, and that his instructions were simply. "Go run the company well."
"They were the only instructions I would have accepted," he said. "Nobody would conceivably ask me to take the job if they didn't want an independent coal company. If you ask, 'Will the company seek its own advantages and opportunities independent of its stockholders?' the answer is an emphatic yes."
Peabody is beset with problems - its earnings have been erratic and last year they declined substantially. It has been tied to long-term, low-prices supply contracts while mining costs have increased dramatically and productivity has been reduced sharply. It has labor, capital, environmental, and mine safety difficulties.
If it is revitalized, and if Kennecott does something sensible with its money before another company tries to pick it off, perhaps everyone will be happy and the controversy about the case will dissipate.
But currently, questions are still being asked.
"It's easy to look back and second-quess the commission," says one antitrust lawyer familiar with the case, a lawyer who holds no brief for the commission. "The difficulty is that, in retrospect, a number of decisions turned out to be ill-advised, but at the time they didn't look that bad.
"It's very difficult to fault the commission, and in fact every court that looked at the case supported them." he said. "No one concluded the commission was wrong on the merits of the case; that is not an irrelevant fact."
Because of an increased concern about the growing level of oil-company ownership of coal resources, some antitrustlawyers feel the commission wasted its time on the Kennecott matter while other potentially more anti-competitive trends were beginning.
Some of the commission's economists wanted the agency to drop the case. Some former officials believe that if Kennecott had not dragged its feet, it might have wound up keeping Peabody in the end.
Under this scenario, instead of stretching out the court battle, Kennecott might have suggested to the commission that there were no viable buyers and that Peabody was too weak to be cut loose. Had Kennecott taken this route, according to a former former FTC member, the commission might very well have cited "changed circumstances" and relented. Instead, Kennecott fought, and the commission began to dig in its heels.
The Kennecott matter also became a policy question, said one FTC official, who contended, "You shouldn't reward delay in a divestiture proceeding." Opening up the Kennecott matter would have set a precedent that would see an endless series of petitions asking the administrative agency to "take a second look" at cases already lost, even in the courts, he said. At the last, the commission wasn't faced with a reopening, it had before it an affirmative proposal seeking commission approval for divestiture to the holding company.
One outcome of the case may be tighter orders in divestiture cases in the future, agency sources suggest. The order in the Kennecott case gave the company the option of finding a buyer for Peabody or spinning it off to Kennecott stockholders. Future orders may require a spin-off if a buyer is not found in a certain period of time.