Kennedy's Plan

Bugaboo of all corporation managements are plans of recapitalization. Usually such plans involve asking stockholders to waive overdue dividends. Invariably hey ask stockholders to swap something hey have bought in good faith for some ew security of uncertain worth. When here are several different classes of stock ach class is likely to feel that its interests ave been sacrificed for the others.

Last December Radio Corp. of America decided upon recapitalization. It has 495-597 shares of Class A preferred which the company can buy in at $55 a share. Dividends on this stock come to $3.50 a year, ear ago Radio Corp. caught up on its back dividends on Class A, so on this stock there are no accrued dividends. It also has 707,275 shares of no-par Class B preferred, which is supposed to pay $5 a year. The last payment was made in October 1931, and back dividends now amount to -L-21.25 a share.* Finally, it has 13,130,600 shares of common. No dividends have ever been paid on the common in Radio's 17 years of corporate life. As 254,000 of Radio's 270,000 stockholders are common holders, the corporation has a quarter of million "owners" who have never received a cent on their investment. Dividends on the preferred stocks come to some $5,600,000, have not been earned since 1930. Radio Corp. wanted to devise some method of getting the common closer to earnings by clearing away the preferred stock, and to do something about the ac cumulated dividends on Class B which by April 1 would amount to $17,260,000.

Having determined upon recapitalizaion smart David Sarnoff, RCA president got Joseph P. Kennedy, onetime SEChairman, to work out a plan for him. He thus took the onus of the plan off the shoulders the management, assured himself that the scheme would be presented under able impartial, authoritative sponsorship. Last week, after about a month's labor Mr Kennedy presented a plan to the RCA directorate, which promptly proceeded to approve it. Though Radio Corp.'s situation involved the two ticklish items in recapitalization--accrued dividends and several classes of stock-- Mr. Kennedy tackled his problem with one great advantage. Radio Corp. had plenty of ready cash At the close of 1934, RCA's balance sheet showed cash and securities of $23,679,000 Last October, Mr. Sarnoff sold half of Radio Corp.'s interest in Radio-Keith-Orpheum to Atlas Corp. and Lehman Bros, for some $5,000,000. These investment houses also took an option on the rest of RCA's holding in RKO for another $5,000,000, payable before the end of 1937. Last November Mr. Sarnoff sold RCA's interest in Electric & Musical Industries, Ltd. (British Radio) for $10,200,000 cash. So Radio Corp. approached the plan well-heeled.

With his problem thus simplified. Mr. Kennedy proposed that Radio Corp. should call its 495,597 shares of Class A preferred at $55 plus accrued dividends, if any. This item would entirely eliminate the Class A preferred at a cost of $27,257,000.

The Class B was more difficult because of the dividend accumulation of $17,260,000-- a total which even Radio Corp. could not handle on top of the expenditure involved in calling Class A. So Mr. Kennedy suggested the creation of a new preferred stock callable at $100 and paying $3.50 a year. Each Class B holder would receive for one share of his Class B, one and one-fifth shares of the new preferred, plus one share of common. Enticement was added to this offer by providing that at any time within the next five years each share of the new preferred could be exchanged for five shares of common.

Mr. Kennedy's plan also provided for a bank loan of $10,000.000. to be borrowed so that working capital might not be unduly lowered by the cash paid for the Class A.

The plan will be voted upon by Radio stockholders in April. Presumably the Class A holders have no complaint, as their stock was bought with the understanding that the company could call it at $55 plus dividends. The Class B holder had to do some arithmetic before deciding whether justice had been done to him. His $22.50 of accrued dividends were gone forever. His new preferred paid only $4.20 a year ($3.50 for the full share, 70-c- for the one-fifth share), against $5 for his present stock. On the other hand, he might get the $4.20, for the Class A preferred would be out of the way and there would be nothing between him and the earnings except interest on Radio Corp.'s very moderate indebtedness. Besides, he could swap his one and one-fifth shares of new preferred for six shares of new common, and he had one share of new common thrown in as a gift. Assuming that he would convert his stock, what he would get would be seven shares of common for each Class B share.

Major problem, for both Class B and for common holders, was the prospective increase in common shares, assuming that Class B holders would take their new preferred and convert it. From some 13,100,000 shares, capitalization would rise to some 18,500,000 shares. This meant about a 41% increase in common shares, and some 5,400,000 new shares among which to divide the profits. Radio Corp.'s 1935 earnings, announced along with the plan's presentation, amounted to $5,100,000. Assuming (recklessly) that Mr. Sarnoff was willing to pay out all his profits in dividends, 1935 earnings would come to a little under 28-c- a share on 18,500,000 shares. The B holder, with 7 common shares, would get $1.96 for each B share now held, which was better than the zero dollars he has received in the past four years. And the common holder would get 28-c- a share, which would be 28-c- a share more than he had ever before received.

*By the time (April) the plan is voted on accruals will be $22.50.

This file is automatically generated by a robot program, so reader's discretion is required.