The Gulf, Mobile and Ohio
By James H. Lemly





Negotiations to Buy the Alton Railroad—1945


THE most important task in 1945 for the Gulf, Mobile and Ohio, was its effort to merge the Alton Railroad into the GM&O’s activities.  All of the studies made by the GM&O appeared favorable to combined operations if a satisfactory capital structure could be secured.  Under a joint operation, a longer haul would be possible on much traffic which formerly had been shipped part of the way to destination over one or the other of the two lines.  From the information available, it seemed that at the time of merging, the GM&O could offer much more to the Alton than the Alton could offer to the GM&O.   This was true primarily because the GM&O could better control its originated traffic and thus deliver much of its northbound business to the Alton at St. Louis.

Another important factor in these studies was the almost complete absence of efficient equipment on the Alton.  During the worst of the depression years, the Baltimore and Ohio (B&O) had had much more equipment than it needed; so it supplied equipment to the Alton, seldom receiving any pay for its use.  As a result of this situation, the Alton had only old, worn-out equipment, and it had no Money to buy anything new.   

With these facts at hand, the GM&O proceeded to negotiate with representatives of the Alton Bondholders Protective Committee in New York.  Another meeting took place in Chicago some time later.  On April 26, the GM&O agreed to acquire the Alton on terms acceptable to the bondholders’ representatives.  In effect, the GM&O was to purchase outright the properties of the Alton.  All Alton mortgages were to be satisfied by bankruptcy proceedings, and the property thus cleared was to be placed under the GM&O’s mortgages instead.

The terms which were finally accepted were these: the GM&O was to give to each holder of a $1,000 3 per cent Alton bond a $500 4 per cent Series B GM&O income bond and 7¼ shares of GM&O common stock, which had no par value but was assumed to be worth $30 in the current market.  The GM&O was to get the Alton properties free of debt, and these properties would be subject to the GM&O’s two mortgages.  The GM&O was to assume the equipment obligations of the receiver of the Alton, and it was also to agree to assume the leases on the Joliet and Chicago Railroad and on the Louisiana and Missouri River Railroad-two of the three leased lines in the Alton system.  The third line, the Kansas City, St. Louis and Chicago, which controlled the tracks to Kansas City, was to be leased under new terms.

Under this plan, the GM&O was to get the Alton properties without any increase in its fixed charges, except in the case of equipment recently purchased by the receiver.  The leased roads, of course, would receive fixed rental payments, but these payments would be relatively small.  Under this plan the GM&O had much to gain and little to lose.  The Alton bondholders, however, felt that this was the best plan which was available to them, and they were glad to agree to the joining of the two systems.  Because the future of the combined properties looked bright, the Alton bondholders deliberately chose common stock rather than preferred so that they could share in the expected rise in GM&O securities.

On the basis of the above plan, the GM&O applied to the Interstate Commerce Commission on May 14, 1945, for permission to acquire the Alton.  Hearings were set for June, and this time no opposition was expected from any source.  The case was prepared carefully, however, in order to forestall any trouble and to speed the transaction as much as possible.

At the same time that the GM&O was negotiating with the representatives of the holders of Alton bonds, negotiations were going on with other interested parties.  The B&O had a variety of secured and unsecured claims against the Alton totaling over $15,000,000, which did not include the Alton stock held by the B&O.  Obviously the B&O did not hope to collect anything like that sum from any reorganization of the Alton; but from the GM&O’s standpoint, it was essential to remove the possibility of B&O interference in ICC proceedings on a prospective merger.  In ail effort to hasten the reorganization, the GM&O on May 25, 1945, paid the B&O $1,190,925.85 for all its claims on the Alton, plus all of the Alton stock, plus the collateral which the B&O had pledged to the Reconstruction Finance Corporation for the purpose of securing an RFC loan previously made to the Alton.  As a result of this action, the B&O was removed from the Alton proceedings entirely, and it tacitly supported the GM&O’s merger proposal.

From this and a few minor transactions which took place later, the B&O received about 2 cents on every $1.00 of total claims that it held against the Alton.  It was obvious, of course, that the B&O’s $25,000,000 in Alton stock represented no equity, and many of the B&O’s claims were unsecured bookkeeping transactions such as those which resulted from the B&O’s practice of providing equipment to the Alton for use during the depression.  Most of this payment from the GNMO was for the relatively valuable collateral which had been pledged against the RFC loan.  In the light of these facts, it seems that the B&O received reasonable payment under the circumstances.  At any rate, the B&O was satisfied with the transaction and did not oppose the consolidation.  It has been said that one of the reasons that the B&O was willing to compromise its claims was its income tax situation in 1945.  The B&O had long ago written off its investment in Alton stock, but the Internal Revenue Department had not been convinced of the losses involved.  By this sale, the Baltimore and Ohio was able to prove its losses and was able to have a major deduction in 1945 to offset its high net income for that year.  If the transaction had come in a less prosperous year for the B&O, the payment required from the GM&O might have been larger or the discussions might have lasted longer.





The ICC hearings on the GM&O merger with the Alton had none of the elements of a pitched battle between rival camps, as had been the case in the Mobile and Ohio merger hearings in 1939.  The Illinois Central, the Wabash, and the Chicago and Eastern Illinois appeared to protect all “through routes and channels of trade via gateways now existing.”  This was quickly settled because it was stated at the opening of the hearing that the GM&O “is willing for the Commission to impose . . .  the condition that Gulf, Mobile and Ohio shall maintain and keep open all routes and channels of trade via existing gateways unless and until otherwise authorized by the Commission.”

Various groups of interested security holders, as well as the receiver, had offered tentative plans to reorganize the Alton, but, as the hearing progressed, all of these groups temporarily shelved their plans and accepted the basic points of the GM&O proposal.  Because of this, the Commission was able to devote the time of the hearings to the effect of the proposed merger on the two roads.

Vice-President Hicks of the GM&O stated that the merger would help his road by increasing revenues, but “the consummation of this transaction results in no increase in Gulf, Mobile and Ohio’s fixed charges except as to Alton equipment obligations-and rentals for leased lines.” He also made it clear that the GM&O did not really want the line to Kansas City, but it had agreed to take that segment in order to speed up the entire Alton transaction.

The main reason the GM&O did not desire this line to Kansas City was that the GM&O was a north-south road and the Kansas City line was primarily an east-west operation.  In addition, everyone connected with the Alton said that the Kansas City line was the major cause of the Alton’s downfall.  The tentative plan to dispose of the Kansas City line made the whole proposition appeal to the GM&O.

The traffic studies which the GM&O had made of the possibilities of combined GM&O-Alton operations were summarized for the benefit of the Commission.  It was pointed out that the combination would be primarily an end-to-end merger and that both lines could feed some additional traffic to the new company, which would tend to increase the length of haul.  The studies indicated, however, that the GM&O would help the Alton more than the Alton would help the Gulf, Mobile and Ohio.  E. B. DeVilliers, Assistant Vice-President in Charge of Traffic for Gulf, Mobile and Ohio, said,

.  .  .  By far the larger part of the additional revenue to be realized from the longer haul of traffic is on the Alton end.  That is, it is contributed by the Gulf, Mobile and Ohio to the haul for the Alton.

We found many more cars being handled by the Gulf, Mobile and Ohio that could be handled via the Alton than vice versa.  Approximately 80 per cent of the additional revenue to be realized is contributed by the Gulf, While and Ohio traffic.  That is, it comes from traffic now being handled by the Gulf, Mobile and Ohio and which we believe will be handled by a longer haul, Alton Junction.  The other 20 per cent is contributed by the Alton.  That is, it comes from traffic now being handled by the Alton which we believe can be handled by longer Gulf, Mobile and Ohio junctions.  .  .  .

Another important point was the fact that the GM&O was not just buying the stock of the Alton, but that it was proposing a true Merger.  Thus the GM&O would accept full responsibility for the Alton as well as have a chance to profit if the Alton should show an improved earning capacity.  E. D. Scruggs, who had testified at the GM&O - M&O merger hearings as a witness for the M&O Bondholders Committee, testified this time as an employee of the GM&O The more important parts of his testimony are quoted in Figure 17.

After the testimony had been given about the corporate parts of the plan and the traffic potentials of the merger, Mr. Hicks was recalled to state the GM&O’s policy with regard to employee treatment in the merger.  His testimony said in part:


Q-[by Exam.  Molster]--Mr. Hicks, didn’t you testify as to the effect of this proposal upon employees?

A-Yes, I did.

Q-As I remember your testimony, you said they would not be adversely affected.

A-I stated, I believe, that they were protected by the Washington Job Protection Agreement, and based on our experience with the Gulf, Mobile and Ohio acquisition in a merger case, not a single complaint arose that was not settled on the property.

Q-How much is it going to cost you to take care of employees under this proposal?

A-We did not avail ourselves of the Washington Job Protection Agreement in the case of the Gulf, Mobile and Ohio case and we did not pay any wage dismissal or any allowances to any employee.  We kept all employees, and that will be our purpose in this case, to retain all employees and let normal and natural attrition take up the slack.


The case for the Alton Bondholders Protective Committee was stated by Mr. Louis Boehm and Mr. Patrick B.  McGinnis.  Mr. Boehm opened this part of the testimony by explaining the manner in which the Alton group began negotiations with the GM&O.  He also gave some of the major reasons why the consolidation was accepted by the Alton creditors.  The major points of his testimony were:


.  .  .  I happened to read or have called to my attention, rather, a statement which appeared upon Dow-Jones’ ticker issued by Mr. I. B. Tigrett, president of the Gulf, Mobile and Ohio Railroad Company, that the Gulf, Mobile and Ohio had made some traffic studies of the Alton Railroad and that it had come to the conclusion that the merger o£ the two roads would be beneficial to both, but that the bonds were widely scattered and there didn’t seem to be anybody to represent them, so they have dropped the idea, so I called Mr. Tigrett on the long distance telephone at Jackson, Tennessee and told him of the existence of our committee and that we were ready to talk with him about a merger.

Thereupon Mr. Tigrett with some of his operating officials came to New York and we negotiated for the sale and merger of the Alton with the Gulf, Mobile and Ohio.

Mr. Tigrett of the Gulf, Mobile and Ohio made us a proposition.  The committee considered it, it made a counter-proposition which was considered by the Gulf, Mobile and Ohio and finally accepted and the present plan and agreement is the result of an arm’s length negotiation between the committee and the Gulf, Mobile and Ohio Railroad and is in the opinion of the committee, the best deal that could have been made under circumstances, particularly in view of the fact that according to the present management of the Alton, approximately $26,600,000 would have to be spent for equipment in addition to $6,000,000 already spent by the Trustee and according to Coverdale and Colpitts, $17,850,000 would have to be spent in addition to $6,000,000 already incurred by the Trustee, making a total in one case of $26,600,000 and in the other case $23,830,000 for this railroad.  .  .  .

Mr. McGinnis went briefly into the background of this transaction front his standpoint.  He explained as follows:

.  .  At the first meeting of the committee I told the committee that we had a lien on the plant and structure but the road was almost devoid of equipment and that my solution, if possible, would be to combine our plant and structure with a railroad having equipment.

Q-Did you and Mr. Boatner thereupon, at the request of the committee, contact certain railroads for the purpose of interesting them?


Q-In merging with the Alton?


Q-What roads did you contact?

A-Between the two of us, the Santa Fe, the Wabash and the Chicago, Burlington and Quincy.

Q-What were you told by the management of these railroads?

A-They displayed no interest.

Q-They were not interested in taking over the Alton?

A-That is right.


Since the Alton group could not interest any of these railroads, they were quite ready to talk with the GM&O about their merger proposal.  Mr. McGinnis stated his reasons:

There were some other reasons why I recommended the acceptance of the GM&O offer.  .  .  .  The offer, as Mr. Scruggs says, is not a purchase of the common stock which happened four times in the past, by various railroads.  It is the acquisition of the physical properties; so that the fortunes of the Alton will be the same as the fortunes of the Gulf, Mobile and Ohio.

Another reason, as I said, I think it is a permanent cure to Alton as against the palliatives that have gone through in the past and I think that the capitalization is reasonable and conservative and yet as far as the bondholders are concerned, we now receive $30 a year interest, when it is paid.

In my opinion, the $500 income bond of the Gulf, Mobile and Ohio 4 per cent, $20 a year, will be paid in any of the foreseeable future so that beginning, if the plan is approved, beginning January 1, this year, the Chicago and Alton bondholder will be receiving what amounts to two thirds of their full interest beforehand, yet it will not be a fixed charge on either company.

We particularly adopted a course of accepting common stock rather than preferred because we believe in the future this combined system and by taking 7¼  shares of stock, if they got a bargain we are going to participate in it and if they did not, the same way but at least in my opinion we are assured of two-thirds of the interest which we would get under our full bond under the old deal.


Another reason that I recommended the plan is that in my opinion, even in normal times, there is hope and justifiable hope for looking forward to reasonable dividends and if we should, in some future year, receive a dividend of 51.00 a share on our seven shares, we are up pretty close to our former full return.

I also think that this combined system eventually will justify a price of $40 a share.  It is presently selling at 27⅞.  In other words, since this deal was announced, the stock has advanced from 16 to 27⅞.

Of course, it is true that the whole railroad market has gone up but nevertheless the percentage is greater in this stock than it is in most of the others which: No. 1, I think indicates that the general market has recognized the substantial fairness of the plan, and even more, the probable success.


Because there was no opposition and all parties seemed eager to proceed to the work of the actual merger, the hearings were brief, and the trial examiners’ report was dispensed with.  Instead, the Commission proceeded to study the case as soon as possible, and on September 19, 1945, it gave its approval to the consolidation plan.

After this step, the Company proceeded as quickly as possible to advance through the maze of legal technicalities toward the merger.  On May 28, 1946, the federal district court approved the plan as a basis for reorganization proceedings for the Alton under Section 77 of the Bankruptcy Act.  It was not until May 31, 1947, however, that all the details of the plan were completed and the task was formally concluded.




ICC FINANCE DOCKET Nos.  14931, 14932


Three different reports were made on the Alton situation.  Back in 1941 Mr. William Wyer made a report for the insurance group of the Alton bondholders and Coverdale and Colpitts made a report for the savings banks groups of the Alton to estimate what effect Baltimore and Ohio control had had on the Alton properties.  After very thorough and careful investigations, they both came to very nearly the same conclusions.

For the year 1939, Coverdale and Colpitts estimated that if the Alton had been operated independently and had owned its own equipment they would have earned $611,000 more than they actually, earned.

Mr. Wyer based his estimate on the three years, 1937, 1938 and 1939 and for those three years he estimated that the Alton would have earned $631,000 additional net if the road had been independently operated.

Exam.  Molster--What does that imply, Mr. Scruggs, that the Baltimore and Ohio was not very generous with the Alton?

The Witness-No, sir, I wouldn’t say that.  I think in my observation of system operation, of any system, the duty of the management primarily is to get the best results for the system as a whole.  The Baltimore and Ohio control of the stock, 100 per cent of the stock of the Alton, and as long as it was solvent, I think they, operated it to get the maximum benefit for the Baltimore and Ohio system.

Exam.  Molster-The Alton would not have been a great deal better off, would it, with these amounts that you have indicated? The Witness: It would have been better off than the earnings in the past showed but, in my opinion, they would not be nearly as well off under independent operation as they would as a part of the Gulf, Mobile and Ohio.

Q.[by Mr. Lott]-And that is the essential difference, is it not, between the Baltimore and Ohio’s control of the Alton and the Gulf, Mobile and Ohio’s proposal?

A-There are several differences.  The biggest difference, as I see it, in the public interest, is that the Gulf, Mobile and Ohio is not proposing to acquire control of the Alton and leave the Alton as a separate company for whatever hazards there might be in the future for that road.

The Gulf, Mobile and Ohio is here proposing to take over the Alton road as such, so that in the future there will be no distinction between what is presently Alton lines and what is presently Gulf, Mobile and Ohio lines.  In other words, they will sink or swim on the total consolidated picture and not on what might happen to one end of the line or what might happen to the other.




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