Commodities, banking wed in new Wall Street marriage
Another Wall Street securities firm has been snared. Salomon Brothers, the nation's second-largest investment banker, and Phibro, a giant oil and commodities trading house, have agreed to merge, turning themselves into one of the world's largest trading firms. Because of Salomon Brothers' size, the sale is important to US capital markets, since the investment banking firm helps provide financing for a significant number of corporations and municipalities.
The transaction, valued at $600 million, will mean that Phibro, the parent company of philipp Brothers, formerly the trading arm of Engelhard Minerals & Chemicals, will add securities to the long list of items it trades. phibro is a major participant in the volatile spot-oil markets -- buying and selling tankerloads of crude oil -- and in the world grain markets. It also trades ferrous and nonferrous metals, steel, coal, fertilizer, sugar, cocoa, and other raw materials.
For the first six months of this year, phibro posted revenues of $12.65 billion and a profit of $128 million. If it were included in the Fortune 500 list of industrial corporations, it would rank in the top 10. As a nonindustrial company, however, it is not ranked.
Salomon Brothers, in a news release, identified itself as the second-largest US investment banker. Wall Street sources indicate it is the fourth-largest securities house in total net capital. The largest investment banker, according to some measures, is Morgan Stanley, and according to others, is Goldman Sachs, both privately held firms.Salomon Brothers has been privately held since it was established in 1910. Although it would not disclose the size, it said it had record operating profits in the first 10 months of its fiscal year year, which ended july 31.
The financial terms of the sale, which will be closed Oct. 1, involve the issuance of $250 million of 9 percent convertible debentures, due 1991, convertible into 9 million shares of Phibro stock. Before the closing, the capital account of Salomon Brothers partners will be distributed to them, and Phibro will give Salomon brothers $300 million in new capital.
The transaction came as a shock to Wall Street. Once the sale was announced, rumors circulated among the investment banking community that some Salomon Brothers partners wanted to withdraw their capital from the firm.
The 62 general partners and 27 limited partners are paid a straight salary, which is drawn against the profits paid out at the end of its fiscal year. The profits are reinvested in the firm. If a partner retires or moves to another firm, he can withdraw his capital only over a number of years, or convert it to subordinated debt. A spokesman for the firm, however, denied that this was the reason for the merger, noting that "partners do very well."
In its calls to its clients, Salomon Brothers told them the merger would provide it with "access to international markets."
According to Joseph W. Bars of the Value Line Investment Survey, the merger is probably good for both concerns. "Salomon Brothers is good at what they do and Philipp is a leader in its business," he stated.
For the first six months of this year Salomon Brothers floated 86 taxable issues worth $9.6 billion and for the first nine months traded securities worth
Salomon Brothers maintains large inventories of government securities, including US Treasury bonds and notes, and municipal securities, which it buys and sells. It also keeps a large inventory of corporate commercial paper, bankers acceptances, and bank certificates of deposit.
The firm employs 2,400 people and has a membership on the New York Stock Exchange as well as most other stock and commodity exchanges. Although it is headquartered in New York, it has offices across the country and has affiliated offices in London and Hong Kong. Its chief economist, and a partner, is Henry Kaufman, who has developed a considerable following on Wall Street for his predictions on interest rates.
In the merger, John Gutfreund, the chairman of Salomon Brothers, will become cochairman of Phibro and continue to serve as chief executive officer of Salomon Brothers, which will be an autonmous part of Phibro. David Tendler will become cochairman and chief ex ecutive officer of the firm.