"Nip and tuck" and "a tossup" are the assessments Wall Street analysts are making in handicapping the possible outcome of Curtiss-Wright Corp.'s audacious attempt to wrest control of Kennecott Copper Corp. from its current management.
Few who follow the beleaguered copper company - "a pitiful, helpless giant" by one description - are willing to make a brief on behalf of Kennecott Chairman and Chief Executive Officer Frank Milliken who is accused of "incompetence and mismanagement" by Curtiss-Wright Chairman T. Roland Berner, the mastermind behind the proxy challenge.
By the same token, Berner seems to have inspired little confidence and credibility with his somewhat intemperate podium-thumping attacks on Kennecott.
More importantly, the big banks and other institutional investors, who hold about 40 percent of Kennecott shares in a few large blocks, seem extremely dubious about Berner's plan to buy back half of Kennecott's shares at $40 each by raising the bulk of the funds through the sale of the recently acquired Carborundum Corp.
They are skeptical on two counts. One, they doubt that Carborundum, a leading manufacturer of abrasives which Kennecott purchased for a pricey $567 million, could legally be sold without putting Kennecott into immediate default on $450 million in recently negotiated bank loans.
And they also doubt the wisdom of selling Carborundum at this point, since it is currently the only real source of profits for Kennecott. The company's copper operations, largest in the country, continue to be loss-ridden because of a heavy worldwide oversupply, a condition expected to persist for at least three more years and maybe longer.
And Carborundum's projected earnings of about $70 million in 1978 will come virtually tax-free, since they will be offset by Kennecott's expected mining losses of about $65 million.
Without Carborundum, the analysts argue, Kennecott's stock would drop as low as $10 a share, given its bleak earnings prospects.
Averaging that $10 figure with the $40 amount Berner is dangling in front of shareholders for half of their shares comes to $25. That is less than the $27 a share Kennecott is now trading around. As a result, a number of major brokerage firms have put out sell recommendations for Kennecott shares at their current level.
"No one seems to be excited about the opportunity on either side," observed Ronald Schorr, metals analyst with E. F. Hutton and Co., referring to the anticipated showdown at Kennecott's May 2 annual shareholders meeting.
"I think they'll go down to the wire," he predicted, "slugging it out on the current themes; it will be pretty close when they count the final votes."
For Milliken, the mild-mannered chairman of Kennecott, this must be head-scratching time as he ponders the combination of misjudgments, circumstances and government interference that got him into such a mess in the first place.
The Peabody Coal Co., which Kennecott purchased 10 years ago, but was forced to sell last year as a result of a divestiture order from the Federal Trade Commission, is at the heart of Kennecott's predicament.
Kennecott bought Peabody, the country's largest coal producer, for over $600 million in 1968. At the time, Peabody was embarked on a major expansion of its production capacity and went to utilities to commit themselves to 20- to 25-year contracts to assure buyers. This put the utilities in the driver's seat, and they negotiated favorable contracts that included few, if any, provisions for cost escalation.
When the firestorm inflation of the 1970s hit, the company was caught between rapidly rising costs, declining worker productivity and fixed returns from its coal sales, despite a boom in coal prices in the open market.
And while Kennecott put an estimated $500 million to $600 million into Peabody for capital expansion, it apparently never realized a profit on the company since the cash flow was always negative.
In 1971, Kennecott was thrown another curve. The FTC, reversing its own administrative law judge, ordered the divestiture of Peabody.
By one account, Sullivan & Cromwell, Kennecott's law firm on the 1968 Peabody purchase, informally cleared the transaction in advance with the Justice Department's Antitrust Division, which raised no objections, but failed to consult with the FTC which also has antitrust jurisdiction and is a rival to justice. At the time, one common view of the FTC in Washington was that it was a hand-maiden to industry, which proved to be a major miscalculation.
Kennecott appealed the FTC's decision all the way to the Supreme Court, which in 1974 declined to review a decision by the U.S. Court of APpeals that there was a trend toward greater concentration in the coal industry requiring the Peabody divestiture.
Ironically, the boom in coal during recent years has brought about 40 new entrants into the coal mining business. And many legal experts think that in today's environment, there would be no way the FTC could enforce such a ruling. They also point out that Atlantic Richfield, one of the country's largest oil companies, last year bought Anaconda, another large copper company, and hardly raised an eyebrow in Washington.
However, Kennecott was forced to go forward with the sale, finally finding a consortium of buyers who were willing to pay a nominal $2.1 billion - $800 million in cash and $400 million long-term notes which has been discounted to $160 million - for an actual realized price of $960 million.
Given the initial purchase price of $600 million, the similar amount invested, the 10 years of no profits, and the inflation of the last decade that in turn has been outstripped by the surge in coal prices. Kennecott seems to have made out pretty badly in the Peabody sale.
Curtiss-Wright's Berner has used this history to accuse Milliken of "running Peabody into the ground."
At the same time, the cash realized by Kennecott from the sale suddenly made Kennecott a sitting duck for a takeover, since its stock price was severely depressed by conditions in the copper business.
To get rid of the cash that was burning a hole in its pocket and to diversify its operations away from copper, Kennecott last fall purchased Carborundum. The price Kennecott paid, however, was controversial. At $66 a share, it was double what the company was trading at a month before the market.
The move angered a number of shareholders who had taken positions in Kennecott, hoping for a takeover at a premium to the market that would have provided them with a tidy profit. They also wouldn't have minded Kennecott distributing some of its Peabody cash to them.
So the Carborundum purchase, which many analysts believe may be the one financially astute move Kennecott has made in recent years, provided the wedge for Berner. Through Curtiss-Wright, he purchased 9.9 percent of Kennecott's shares over a two-month period and then announced his proxy challenge.
As Kennecott has pointed out in one of its letters to shareholders, Berner first got a seat on the Curtiss-Wright board in 1948 after mounting a similar, but unsuccessful, proxy battle for control of the New Jersey aerospace manufacturer, also promising a cash distribution which never occurred, but finally winding up as head of the company.
Now "in fashion somewhat reminiscent of the old corporate pirate raiders of the 1960s," in the words of one analyst, "Curtiss-Wright appears to be attempting to make Kennecott walk the Plank."