Firm Will Buy Unit, Pump in Cash : Allied-Signal to Get 32% Interest in Oak Industries
In what one analyst described as a rescue effort, Allied-Signal said Tuesday that it has signed a letter of intent to buy a major Oak Industries unit for $160 million and to pump another $15 million in cash into the ailing San Diego-based company in exchange for an ownership stake of nearly 32% and three seats on Oak’s board.
Oak said it will use the proceeds from the sale of its materials group, combined with up to 11 million existing shares of its common stock, to retire its outstanding debt. The company said it intends to exchange the cash and stock for its $230 million in publicly held bonds.
The exchange rate for the bonds will be determined next week, although it will be for less than face value, according to Oak Chairman and Chief Executive E. L. McNeely. Directors of both companies have approved the proposal, and a formal agreement is expected next week.
The deal is contingent on Oak’s receiving at least 85% of the bonds in the exchange offer. A special Oak shareholder meeting to approve the deal will be scheduled soon, officials said.
Under terms of the letter of intent, Allied-Signal will pay $15 million for 10 million shares of newly issued Oak common stock and a warrant to buy another 4.2 million. Oak plans to use that money to expand its remaining operations.
If Allied-Signal exercised the warrant, Oak’s shares outstanding would increase to 44.9 million from 30.7 million. The stock is traded on the New York Stock Exchange, closing Tuesday at $1.875 a share, up 25 cents.
As part of the transaction, Oak will elect a new seven-member board, three of whom will be proposed by Allied-Signal, Oak said.
“It’s a good bail-out for Oak,” said one analyst who asked not to be identified. “Allied-Signal will call the shots in exchange for saving Oak.”
Oak, once a high-flying diversified media company, was hit hard by the recession and financial pressures from its own ambitious expansion plans. In addition, the subscription-TV market that Oak banked on soured and the company produced a batch of faulty converters for cable television, resulting in a string of huge losses--$300 million from 1982 through 1984.
Oak’s net loss for the first half of 1985 was trimmed to $13 million, although its negative net worth remains a staggering $60 million, McNeely said Tuesday.
Oak’s materials group, based in Hoosick Falls, N.Y., and with plants in the Far East, makes laminates, or “high-tech plywood,” used in electronics. It generated $186 million in sales last year, employs about 1,400 people and is a profitable operation, Oak officials said.
Allied-Signal’s purchase of the group is “the type of thing I would expect them to do,” said Katherine M. Stults, vice president of research for Dean Witter Reynolds in New York. “They’re interested in increasing their exposure to the electronics industry, (so this) fits in with their strategy.”
Discussed for Year
The proposed deal, according to sources familiar with the exchange, has been discussed for about one year, or well before La Jolla-based Signal Cos. agreed to merge with Allied Corp. earlier this year.
McNeely, who described the proposed deal as “good for both companies,” is a longtime friend of Forrest Shumway, Signal’s former chairman and chief executive and now vice chairman of Allied-Signal.
“Forrest and I were not the originators of the conversation, (and) our relationship is fairly incidental to this,” said McNeely, adding quickly, however, that their friendship “didn’t hurt” the deal.
After the proposed sale, Oak would be left with only its components segment and an unprofitable communications subsidiary, which operated Oak’s now-discontinued ON-TV operations. Oak is looking for a buyer for the subsidiary.
Management’s goal, McNeely said, is to be left with only the components segment, which makes and markets controls for gas and electric appliances as well as components for several types of measuring instruments. The segment, which generates about $120 million in annual revenue, is the line of business that launched Oak in 1932 in Crystal Lake, Ill.
Once it is pared down, McNeely said, Oak will be “out of the media business. . . . We’ll have a company with $120 million in volume and very little debt.”
Beyond ‘Survival Stage’
The deal will put Oak “in the position of beyond the survival stage,” he said. “We can now make our own way.”
The bonds that Oak wants to retire were issued last spring as part of a complicated exchange designed to reduce the cash-strapped company’s $28 million in annual interest expense. Oak strongly suggested at the time that it would file for bankruptcy protection if bondholders didn’t approve the restructuring. About 79% of the bondholders approved it.
Since then, Oak has paid the interest on those bonds in common stock, not cash.
Oak shareholders in June approved doubling the company’s number of outstanding common shares to 80 million so that management could be “flexible” and respond to potential merger or equity infusion deals such as the Allied-Signal proposal.
