Gencorp Suit Claims Suitor’s Financing Proposal Is Illegal

Less than a week after being hit with an unsolicited $2.2-billion takeover bid, Gencorp filed suit Monday to block the effort, claiming that it violates federal securities and stock financing regulations.

Further, the suit alleges that General Partners, the investment group that tried unsuccessfully last year to buy Lear Siegler Inc. of Santa Monica, has launched a highly leveraged buyout offer solely to make money on the company’s stock, not because it truly wants to buy and operate Gencorp’s diversified holdings.

The Akron-based conglomerate--formerly General Tire and Rubber Co.--makes General tires, owns Aerojet General in La Jolla and holds licenses for 15 broadcast stations, including KHJ-TV in Los Angeles.

The suit asks the court to halt the partnership’s efforts to increase its stake in Gencorp through its $100-a-share cash tender offer. The partnership now controls or owns 9.8% of Gencorp’s shares.

Despite the suit, a spokesman for Gencorp’s would-be buyers said they have talked to the company’s chairman and remain hopeful that Gencorp will accept “a negotiated transaction.” The partnership declined comment on the suit, which was filed in U.S. District Court in Columbus, Ohio.

The partnership, which includes Irvine-based AFG Industries and Wagner & Brown, a Texas oil and gas drilling firm, also began Monday to solicit proxies from Gencorp shareholders for the March 31 annual meeting when a vote is scheduled on a series of anti-takeover proposals.

Staggered Terms

The partnership is opposed to Gencorp’s proposals to stagger directors’ terms, increase the number of its shares and eliminate cumulative voting for directors. The partnership, however, won’t be able to vote its shares since its 9.8% stake was purchased after Feb. 10, the record ownership date for voting at the annual meeting in Akron.

Meanwhile, in New York, investment manager Mario Gabelli filed notice with the Securities and Exchange Commission that his institutional clients own a total of nearly 7.3% of Gencorp’s shares, about 150,000 shares, or 0.8% more than they did last week, when General Partners launched its buyout.

Gabelli, who has already labeled General Partners’ effort a “greenmail” attempt, declined to comment on the latest purchases. However, Gabelli earlier said he would vote against Gencorp’s “anti-takeover” proposals.

Gencorp’s suit against its would-be buyers charges that the partnership’s takeover efforts are illegal because they violate U.S. Securities and Exchange Commission and Federal Reserve Board disclosure and financing requirements for takeover attempts.

Proposed Financing

According to the suit, the proposed financing of the takeover is illegal because it requires the partnership to borrow more than 50% of the value of the stock to be purchased. Federal Reserve Board regulations limit the amount that can be borrowed to 50% of the stock’s value.

General Partners’ proposal calls for it to acquire Gencorp for a total of $2.2 billion, of which they would invest just $250 million in cash and other collateral. The remainder would be financed through bank and other borrowings, primarily “junk bond” financing, arranged by the partnership’s investment bankers, Shearson Lehman Bros. of New York.

In addition, the suit claims that the partnership has violated federal disclosure regulations by failing to reveal “the illegal nature of (its) proposed financing scheme” and its true intentions for acquiring Gencorp stock.