(THE CONTEXT: Foreign investment in the United States is burgeoning, while public consciousness of this perennial phenomenon has been raised by the prospect of Middle Eastern oil money buying large pieces of American corporations and real estate. The traditional investors in the U.S. have been the Europeans, but in recent years, nouveau investors…the Japanese, the Arabs, the Iranians…have appeared on the American horizon. An understanding of the impact of foreign money and foreign ownership is obscured by a lack of knowledge. The following article deals with a Saudi Arabian businessman’s investment in an American agribusiness.)
Whenever the United Nations General Assembly has met in recent years, heads of state, foreign ministers and others with the power to spend the fabled piles of petrodollars have gathered from remote parts of the Middle East into easily-accessible New York City.
Considering the stories flowing out of the Middle East about American businessmen going through the exhausting “drill” of waiting long hours and days in anterooms and enduring the indignities of intestinal water bugs and sleeping on extravagently-priced cots in corners of crowded hotels, it seems almost the makings of a corporate tragicomedy to realize that so many of these same powerful Arab and Iranian money men could be reached at the Hotel Pierre or the Waldorf Astoria when the UN is in session.
In the fall of 1973 — a point in history when the UN was meeting, when the Arabs and the Israelis were fighting once again and when the price of oil was about to be quadrupled — Adnan Khashoggi, the Saudi Arabian entrepreneur, and an entourage of his business associates arrived in the city. They are usually around when the UN is in session. Stephen H. Lockton, an investment consultant, took this opportunity to breakfast at the Waldorf with Morton P. MacLeod, the American in Khashoggi’s inner sanctum for the past decade. Lockton had known Khashoggi and MacLeod for nine years, dating back to when Lockton worked at the Wall Street firm of Donaldson, Lufkin & Jenrette, which managed several of Khashoggi’s Triad Group investment funds. At that breakfast, Lockton suggested to MacLeod that some of the largest stockholders in Arizona-Colorado Land & Cattle Co. might be interested in selling their shares.
Triangular Investment
The seed of Lockton’s idea was to flourish into a $9-million investment by Khashoggi in Arizona-Colorado stock and the prospect of joint ventures by the American firm and Khashoggi’s Triad Group of companies in the Sudan, Egypt and Iraq. A multitude of speeches have been made urging the concept of triangular investment — the use of Arab capital and American technology to help develop Third World nations. Khashoggi seems to be in the process of transforming that rhetoric into reality.
In November, 1974, the Triad organization created AZL International Corporation to exploit agribusiness opportunities in the Middle East. Arizona-Colorado agreed to provide technical expertise and some top management for the new corporation. F. Michael Geddes, chairman and president of Arizona-Colorado told his stockholders: “We are very hopeful that this new involvement with a well-respected Arab partner can, with virtually no risk to the company, lead to future significant income through management fees, commissions and the eventual exercise of our option to acquire a 40 percent ownership pcsition in AZL International.” Others are not as sanguine about the Arizona-Colorado/Triad relationship — and have assumed a guarded, if not outright suspicious, attitude towards Khashoggi.
Despite the reserve with which some are viewing Khashoggi’s position in Arizona-Colorado, the Saudi businessman was invited to invest in the company. Sitting behind his large, old-fashioned desk in the Look Building on Madison Avenue, Lockton, who at 36 still retains a trim athletic figure (he was coxswain of the Crew in his college days at Trinity in Hartford, Conn.) said: “There was some discontent (among major stockholders who wanted to sell their stock). I was convinced for example that U.S. Steel (Pension Fund) wanted to sell…So I said to MacLeod, ‘there might be a selling interest in the company.’ I seeded the idea.”
Lockton concedes that Arizona-Colorado and the Khashoggi organization were on a collision course anyhow. They seemed destined to be joined. Khashoggi had decided, as he told an interviewer in Beruit before the Troubles (as the Irish would call it) began there : “…we have come to the conclusion that the agro business is as important to the Arab World as oil.”
Arizona-Colorado, for its part, had ambitions to go international for some time. The company’s management had seen other major American agribusiness firms moving around the world selling technical expertise — and they were convinced that they could too. Arizona-Colorado is probably the only fully-integrated, publicly-held cattle company in the nation, which means that the company breeds, raises, feeds and slaughters cattle. Mixed into that attractive package of skills is an agricultural equipment manufacturing division (booming farms mean a booming demand for farm machinery) and an engineering division with particular expertise in irrigation and sewage facilities.
An early feeler in search of international business went out a couple of years ago when some Arizona-Colorado insiders sat with associates of the Rothschild interests in London to discuss the possibility of a sugar venture in Morocco. Nothing came of that, but in 1973, Cavenham Ltd., the British food conglomerate, considered the acquisition of Arizona-Colorado. Price was the problem — and F. Michael Geddes and other financial advisors told the British that they couldn’t possibly get 100 percent of the company’s stock for the price they were willing to offer. Cavenham went away to pursue other targets — adding a controlling interest in the Grand Union Company to its multibillion dollar empire in 1973.
The Lufkin Touch
The story of how Arizona-Colorado grew from an obscure, foundering, privately-owned company in Phoenix to a firm with a respected international reputation goes back to 1964. At that time, Peter Wray, former treasurer of the privately-held ranching company, approached Dan W. Lufkin, chairman of Donaldson, Lufkin & Jenrette, in search of new financing to bail the company out of a quagmire of debt. Lufkin is one of those legendary figures of Wall Street who started out with a Harvard Business School degree, a couple of years experience in an investment house, and a few thousand dollars in borrowed money to build a fortune. In 1971, when he was 40, Lufkin had piled up a fortune estimated at $35,000,000.
The primary force in the group of investors whom Lufkin had gathered for the operation to pump new financial life into the cattle company was the Pioneer Lands Corporation — a venture capital holding company involved in dozens of transactions. Pioneer Lands consisted of Neil McConnell, a venture canitalist with a Midas touch holding the largest interest; Frederick Melhado, then McConnell’s partner in the investment banking firm of McConnell, Melhado; Lufkin; and Louis Marx Jr. of the Marx toy family who parlayed a moderate fortune into an enormous fortune through wildcatting for oil. Stephen Lockton, his brother David, and their father Richard C. Lockton, were also among the original investors brought in by Lufkin.
The ranching operation which they acquired consisted of two-million acres of land and 100,000 head of cattle. To turn around the losing operation, they hired experienced cattlemen to run the ranches — and sold 800,000 acres of the land while trimming the herd to 5,000 head in their first year of operation. What emerged was the Arizona-Colorado Land & Cattle Company with Lufkin as chairman and Wray as president. When the company went public in 1968, Geddes, who is also a product of the Harvard Business School, was named president at the age of 32.
As early as 1968, Khashoggi’s Triad organization held a small block of stock in Arizona-Colorado giving the Saudi businessmen and his associates an awarencss of the development of the company. While federal laws prohibit the giant meatpacking companies from integrating their operations backwards from the slaughterhouses to the ranches to prevent them from monopolizing the beef industry, Arizona-Colorado bloomed in the opposite direction. Starting out with a ranching operation, Arizona-Colorado began to build a vertically integrated structure: in 1968, Arizona-Colorado acquired the Hughes & Ganz Cattle Co., one of the country’s largest cattle feeders, following that move with the purchase of the OK Meat Packing Company in 1970.
The Khashoggi Parallel
By coincidence, Khashoggi’s own emergence into international business parallels the growth and development of Arizona-Colorado. Khashoggi had founded the Alnasr Trading & Industrial Corporation in Riyadh, Saudi Arabia in 1953. He was 18 years old and Alnasr Trading was only the third firm incorporated in Saudi Arabia — an indication of just how young corporate society is in that part of the world. Alnasr, which means “victory”, apparently was named for Victoria College, the exclusive boarding school in Egypt where Khashoggi received part of his education.
In 1965 — at about the time that Lufkin was emerging with the new Arizona-Colorado — Khashoggi decided to reorganize his own blossoming business empire, expanding its perimeters to enable it to participate in more sophisticated and technical projects which would require multi-national contacts. Alnasr Trading in this process evoIved into the Triad Group of Companies, and Khashoggi moved into big time arms sales for U.S., French and British companies.
As the name Triad indicates, there are three related persons involved in the company: Khashoggi and his two younger brothers: Adil, 39, a graduate of the University of California at Berkeley, and Essam, 36, a graduate of California State University in San Jose. Khashoggi himself also attended a California college: Chico State. While it has been generally reported that Adnan Khashoggi owns 80 percent of Triad Holding Company, S.A., the parent corporation of the Triad Group — documents, signed by MacLeod on file with the SEC, show that Khashoggi is “the owner of over 99 percent” of Triad’s outstanding stock.
While the bulk of American news stories on Khashoggi have centered on his huge fees from arms sales — reaching as high as $45,000,000 for a single contract — the Triad Group is involved in a broad spectrum of investments: housing in France, banking in California, a slaughterhouse in Brazil, the sale and maintenance of cars and trucks in Saudi Arabia (Khashoggi collected $50-million in commissions for Chrysler products alone between 1953 and 1973) and on and on and on.
Khashoggi has even bigger plans for the future — a number of them designed to exploit the vast agricultural potential of the Middle East. With agribusiness on his mind, Triad’s MacLeod and Khashoggi began talking to American agribusiness executives, including those at Arizona-Colorado in 1972 or ’73. Arizona-Colorado was asked, for example, to look at a cattle project in Brazil on behalf of Khashoggi, and Triad was said to have acquired a feedlot operation in Arizona (although this hasn’t been confirmed).
The idea which Lockton “seeded” in the fall of 1973 was carried into reality in the spring of 1974 when the investment banking firm of Morgan Stanley contacted him on behalf of Triad to retain him as a consultant in putting together a large block of Arizona-Colorado’s stock.
Lockton was suprised to find that some of Arizona-Colorado’s large stockholders whom he originally thought were anxious to sell out, such as the U.S. Steel Pension Fund, had decided to hold onto their shares. Between April 15 and April 30, 1974, Triad acquired 500,000 shares, most of it in private transactions, for $9,235,762.
The appearance of Khashoggi gave large stockholders the opportunity to move out of the company quickly and easily while picking up a premium price for their stock. Most of the stock was sold for about $18 a share, which was $3 to $4 over the going market rrice at the time. The buying spree sent the price of the stock to slightly over $20 a share that summer. Lufkin, who held 234,000 shares in Arizona-Colorado just before he stepped down as chairman of the board to become Connecticut’s first Commissioner of Environmental Protection in 1971, had been selling off his stock through the years. He was said to have sold the balance of his holdings in the company, 100,000 shares, to Triad. Despite Triad’s client-investor relationship with Donaldson, Lufkin & Jenrette, Dan Lufkin’s close associates and a Khashoggi advisor said that the two men have never met.
McConnell, who was the largest stockholder in the company with 452,586 shares, sold 65,000 shares to the Triad group. The Locktons who owned more than 200,000 shares between them sold only 17,323 to Khashoggi — all from the porfolio of David Lockton, who with his father, was a director of the comnany.
With some subsequent small purchases, Triad’s holding in AZL has been brought up to 510,000 shares — or 14.67 percent of the common stock, making it the new largest stockholder in Arizona-Colorado. In most publicly-held firms, a block of stock of those proportions would guarantee control of the company, but the situation at Arizona-Colorado is more complex. The executive officers of the company, between them, own almost as much stock as Khashoggi, and McConnell, now the second largest stockholder, retains 387,586 shares, or 11.15 percent of the common stock.
Clearly, there are some balancing factors to control by Khashoggi. Besides, the Saudi businessman has stated in interviews: “Triad doesn’t believe in the take-over. We don’t believe in displacing existing management. We come in because we think they’re doing everything very well and we don’t want to change things — only enlist their help in our plans…” Stephen Lockton reaffirms this perspective. Lockton said: “I believe they (bought their stake) in Arizona as a demonstration of faith in the company.”
Since the arrival of Khashoggi and his Triad organization, there has been a dramatic shifting of directors. Six have left, including the two Locktons and Cyril F. O’Neill Jr., Lufkin’s personal attorney who also did legal work for McConnell. Five new directors have come onto the board. Of these only one, MacLeod represents the Triad organization. Another new director is James G. Niven, a business associate of McConnell’s.
Niven, a man of huge stature whose presence dominates a room, played soccer at Harvard and got his introduction to big business by working five years at Lehman Brothers. Now only 30 years old, Niven is a general partner with McConnell in Pioneer Ventures Company, a venture capital operation.
A common practice in the Middle East — even in Saudi Arabia which is overflowing with petrodollars — is to require foreign companies along with their technical skills to invest some fresh capital as a sign of their good faith. One way of building the foreign company’s capital investment in a project is to require that profits be plowed back into the project. Niven said: “If all fees have to be returned as equity, I will campaign vigorously against any such situation…I really feel American investment in terms of capital should be kept here. If we want to sell our technology, fine. But let’s not own anything. Let’s get paid for it. Let’s bring our earnings back here.”
Niven said that nothing definite had been proposed in this realm, adding: “My guess is that they will raise it (the approach of plowing back fees as equity). I trust my gut. I have a strong hunch that’s the way it’s going to work.”
Niven, who is a British subject, said that his concern is the penchant of so many foreign countries to appropriate U.S. companies’ investments. He said: “I will certainly try to resist any attempt by Khashoggi or his people to exploit AZL (Arizona-Colorado) to his advantage. He could well come up with some terrific deal where we could make money. (But) I would be against us making an investment in any project that involves equity in an operation in the Middle East…If Khasnoggi comes to us and says, ‘Here’s an opportunity. You’re going to get a terrific fee, but it will have to be reinvested as equity,’ I say the hell with that piece of business. Give it to someone else. I’m big on cash flow. That isn’t cash flow.”
Some of the Khashoggi projects appear to offer enormous opportunities for Arizona-Colorado. In December, Triad announced that the Sudanese government had approved a $93,000,000 project involving the development of million-acre cattle ranch by AZL International near the Blue Nile. The Sudan is to come up with $51,000,000 — and the balance is to be provided by Triad, Arizona-Colorado and other investors.
In Egypt, AZL International has signed a $30,000,000 contract with the government to establish a dairy farm on a 17,000-acre tract in the Eastern Delta near the Suez Canal. Chase Manhattan Bank’s Mideast Markets publication said in December that financing for the project had yet to be worked out. The AZL site is next to a 500,000 acre tract which the Egyptian government hopes to exploit for agriculture using Nile water for irrigation, according to Mideast Markets.
Arizona-Colorado has also formed a new engineering subsidiary, CVL International, to work in the Middle East. Geddes recently told his stockholders that negotiations had been completed on a $34,000,000 sewage collection and treatment facility for Basrah, Iraq. Geddes said that work is expected to begin early in 1976 on the project, which is huge by Iraqi standards.
Some Conclusions:
A man often is what he says he is. Adnan Khashoggi has said again and again that he is a man interested in building a free enterprise economy in the Middle East. His investment in Arizona-Colorado seems to be a reflection of what he has enunciated as his uniform investment philosophy. Which, as a close aide put it, is “It has to be potentially profitable. It has to be something from which Triad can gain experience to build the Middle East after the oil is gone. The Saudis do not want to go back to being Sand Arabs.” The same person said, “His real interest is not making more money. His interest is building a free enterprise economy. He wants to bring about a marriage between Arab capital and Western — read American — technical skills.”
Khashoggi has had some bitter investment experiences in the United States — for example the opposition to his investing in a bank in San Jose, Calif. He has also suffered through adverse publicity involving his enormous arms fees and an allegation — which he denies — that he passed bribes from a U.S. arms company to Saudi generals. Despite this, his aides insist that he will continue to pursue investment opportunities in the U.S. when he is welcomed, such as he was by the key investors in Arizona-Colorado. They were anxious to sell for the price he was willing to offer which makes the free enterprise system go round.
Khashoggi through Arizona-Colorado and his AZL International is in the process of putting the triangular investment concept to work, a concept espoused in the speeches of Assistant Secretary of Treasury Gerald L. Parsky. The sunrising thing about Arab investment in the U.S. has not been the flood but the drought (a point made by Pete Peterson, chairman of Lehman Brothers and former Secretary of Commerce) — and Khashoggi is in the process too of trying to do something about that. His aide said: “The U.S. has several times ennunciated a welcome to Arab capital. Mostly through Gerald Parsky. He keeps saying: ‘we welcome Arab capital.’ But where is it welcome? The U.S. has done nothing to say where.” What is Khashoggi doing? The aide said: “Adnan has commissioned some of the world’s outstanding economists in the U.S. to study where to invest the government money, the big Arab money.” He refused to identify the economists, but said that the study would soon be ready.
The final conclusion: The big Arab money is coming — and Khashoggi is showing the way.
Received in New York on January 13, 1976
©1975 Kenneth C. Crowe
Kenneth C. Crowe is an Alicia Patterson Foundation award winner on leave from Newsday. His fellowship subject is the investment and movement of foreign funds into the U.S., especially OPEC nations’ oil monies. This article may be published with credit to Mr. Crowe, Newsday, and the Alicia Patterson Foundation.
