Neat Decision

Over a month ago, Wendell L. Willkie's $1,214,000,000 Commonwealth & Southern Corp. told the Securities and Exchange Commission it would like to do some financing with and for its subsidiary, the $275,000,000 Consumers Power Co. (TIME, Dec. 11). Since then businessmen and politicos have played volleyball with rumors about how SEC would handle Presidential-Prospect Willkie's application. Last week, criticizing Commonwealth & Southern for dilatory filing of its intentions and for pressure tactics, SEC handed down a decision which neatly forestalled accusations that it was bent on handcuffing business enterprise.

Issues before the Commission:

1) Stock purchase by C. & S. from Consumers Power. Lawyer Willkie and the big-time law firm of Davis, Polk, Wardwell, Gardiner and Reed purposely or otherwise overlooked the fact that this kind of transaction doesn't require approval. SEC didn't, ruled that the proposed $3,500,000 stock deal was exempt from its jurisdiction, told C. & S. to go ahead for all it cared. Dissenting were New Deal Commissioners Leon Henderson and Ed Eicher.

2) Competitive bidding, an issue in the case only if Morgan Stanley and its syndicate partner, Bonbright & Co., were found to be "affiliates" of C. & S. ("standing in such relation [to C. & S.] that there is liable to be an absence of arms' length bargaining"). The Commission chairman, Majority Spokesman Jerome Frank made clear the irrelevance of competitive bidding "since there is concededly no rule row in effect which requires such bidding." To speed matters up, Morgan Stanley and Bonbright agreed to "impound" their cut of the proposed $28,594,000 bond issue, do all their work for glory alone, if the Commission later found them to be C. & S. affiliates. The Commission accepted this offer, decided (New Dealers Henderson and Eicher again dissenting) to table the "affiliates" question.

3) Underwriter's cut on the bonds amounting to a two-point spread including a 3/8 of a point managers' fee for Morgan Stanley and Bonbright. The Commission conceded that it had previously sanctioned such spreads and fees in other deals. Moreover, the Commission made a point of asking Interveners Otis and Halsey Stuart, who tried to crash the syndicate gate (TIME, Dec. 11), if they would have offered Consumers a better bid. But investment banking's No. 1 "outsiders" refused to get down to brass tacks, simply repeated that they wanted competitive bidding. Decision O.K.'d the bankers' cut, Henderson and Eicher again dissenting.

4) New money, amounting to $10,000,000 of the proposed $28,594,000 bond issue (the remaining $18,594,000 would refund an older bond issue paying a lower interest rate). Under the statute, the Commission is charged with determining if a new security issue is: 1) necessary, 2) desirable for the issuing company. Halsey Stuart and Otis had offered to put up this new money for common stock instead of bonds, to take a risk as minority holders in Consumers Power instead of adding to its debt as C. & S. proposed. Because of this offer bond financing was no longer necessary. Thus the only question was whether it would be good for Consumers.

This time a different majority (Republicans Healy and Mathews dissenting) drew a moral from too much fixed charge financing by the railroads; admitted that Consumers would undoubtedly be able to meet the proposed interest and dividend bill; nevertheless pointed out that bond instead of common stock financing would aggravate Consumers' unfavorable comparison with other top-notch operating units.* Finding equity financing feasible, the majority decision disallowed the $10,000,000 of new debt financing. But the Commission emphasized that it wasn't telling Consumers it had to sell its common to Otis or any one else, in fact left Consumers free to sell $10,000,000 of its common to the public or to C. & S. Ready customers for Consumers common, plus SEC's preference for equity money, contradicted Willkie's well-known plaint: that Government interference has stymied utility risk financing.

On the SEC's new money bond veto, only remaining point of contention, C. & S. and the syndicate were given ten days in which to appeal. Meanwhile, Wendell Willkie issued a statement that tried to make two main points: 1) if Consumers Power's $70,000,000 of preferred stock is added to its common, its ratio of stock and surplus to capitalization rises to 49%; 2) that inclusion of a minority interest in Consumers would complicate the problem of integration--a problem irrelevant to the proceeding at hand.

*Common stockholders of Detroit Edison have an equity of 49% of its depreciated property value (after bonds): common stockholders of Cleveland Electric Illuminating have a 42% equity (after bonds and preferred stock). In Consumers Power the common has only an 11% equity (after bonds and preferred stock).

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