Kasler’s Merger Hits a Bump as Directors Balk

There’s opposition to Southland highway construction company Kasler Corp.’s proposed merger, and it’s coming from an interesting place: Kasler’s own board.

Three of Kasler’s eight directors say they will vote against the company’s plan to combine with Montana millionaire Dennis R. Washington’s private construction firm, Washington Contractors Group. Shareholders meet July 9 in Ontario.

Wall Street doesn’t appear too enamored of the deal either: Highland-based Kasler, which has built 205 major roadways in California since 1947, has seen its stock slump from $11 in February (just before the deal was announced) to $7.25 now.

The directors opposing the merger apparently feel that Washington has struck far too rich a deal for himself. Coincidentally, that’s the same charge that dogged Washington last year, when he tried to take Washington Contractors public. The stock offering was aborted when investors balked.

In the proposed Kasler-Washington merger, Kasler shareholders would exchange their 10 million shares for the same number of shares in a new company, Kasler Holding, which would continue to trade on the New York Stock Exchange. But Washington would get 19.5 million new Kasler Holding shares, leaving him with 66% of the combined firm, to Kasler shareholders’ 34%.

Patrick Ortiz, one of the dissident directors, is married to Jill Kasler, a member of the company’s founding family. Between the Kasler family trust and the Ortizes’ shares, Ortiz represents just under 10% of Kasler’s total shares--a big block.

Ortiz says he has nothing against Washington, a 58-year-old construction and mining magnate whose fortune has been estimated at $600 million by Forbes magazine. “In the long run, I feel he might be very beneficial to the company,” Ortiz says. But as a Kasler shareholder, he says, “I think we should be able to get a better deal.”

Ortiz and the Kasler family may not be alone in their opposition: Several large Kasler shareholders, including Santa Monica-based Dimensional Fund Advisors (which owns 5.3% of Kasler stock), said Tuesday that they hadn’t yet decided whether to support the merger.

Why split the new company’s equity 66-34 instead of 50-50? Based solely on sales, Kasler actually is the bigger firm: $162 million last year to Washington Contractors’ $134 million.

But Dennis Washington argued that his operation was significantly more profitable, earning $13.6 million last year to Kasler’s $6.5 million. He also contended that his firm would be valued much more highly (than Kasler) if it were a public rather than private company--an argument that some analysts found interesting given that the market wouldn’t accept Washington Contractors as a public firm last year.

In any case, when the Kasler board asked Los Angeles brokerage Seidler Amdec Securities for an opinion on Washington’s offer, Seidler said it viewed a 66-34 split as fair to Kasler shareholders. Seidler said it based its opinion primarily on the earnings contributions the two companies would have made to a combined corporate entity had the two been merged from 1988 to 1992.

Unimpressed, Ortiz and two other directors, Kay D. Jones and Vincent O. Smith (both Kasler family friends), take up one page of the merger proxy airing their dissent. Their opposition appears to stem partly from the perception that Washington bullied Kasler by quietly acquiring 8.3% of the stock, then springing a surprise takeover bid.

In the proxy, the dissenting directors contend that “despite the aggressive and unsolicited nature of (Washington’s) takeover proposal, the Majority Directors made little effort to open the bidding to others who might have had an interest in merging with, or acquiring, Kasler.” Kasler officials, however, maintain that the firm looked at three other possible combinations with rival firms but that none of them offered the long-term benefits of a Kasler-Washington Contractors marriage.

Wall Street analysts generally agree that Kasler needs a partner and that Washington Contractors is a good fit. The highway construction business has become so cutthroat that Kasler’s near-term earnings outlook is dismal. The firm earned 65 cents a share last year but is expected to earn only about 30 cents this year, without a merger.

A Kasler-Washington combination would create an entity that could bid on much larger projects than either firm can alone, and would reduce Kasler’s dependence on the California road market.

David Batchelder, the investment banker advising Washington, says that in meetings with Kasler shareholders in the East this week, he’s encountering “no resistance” to the deal’s terms.

Then why has Kasler stock continued to sink? Batchelder points out that most heavy construction stocks have been weak, reflecting the tough earnings environment--which he concedes is affecting Washington’s 1993 bottom line as well.

Even so, it’s hard to avoid the conclusion that more investors either don’t like the look of this merger or don’t trust Dennis Washington enough to give him control of the combined entity’s future.

Kasler Stock Fades

Shares of Southland highway construction firm Kasler Corp. have sunk since the company agreed in February to a merger with Washington Contractors.

Tuesday: $7.25