First Nationwide to buy Cal Fed More acquisitions of California thrifts are anticipated

July 30, 1996|By BLOOMBERG BUSINESS NEWS

LOS ANGELES -- First Nationwide Bank FSB will buy Cal Fed Bancorp Inc. for $1.2 billion in cash, or $23.50 a share, combining two of California's biggest savings banks, the companies said yesterday.

It's the second acquisition agreement in a week involving a large California thrift. The previous Monday, Washington Mutual Inc. of Seattle agreed to buy Irvine-based American Savings Bank, also for $1.2 billion.

Analysts have for months predicted acquisitions of large California thrifts, as California-based banking companies try to improve profitability and out-of-state companies seek a foothold in the most-populous state.

Cal Fed Chief Executive Edward Harshfield has been open about his willingness to sell the company.

"We're too big to be a boutique and we're too small to survive, so something had to give," he said.

"Size is now becoming critical" for savings and loan companies, he said, adding that he expects more acquisitions of thrifts, especially small- and mid-size companies.

Cal Fed shares rose $1.25 to close at $22.625. In the past two weeks, shares increased 23 percent on speculation that the Los Angeles-based company was in talks with San Francisco-based First Nationwide.

A closely held company controlled by New York billionaire investor Ronald Perelman, First Nationwide has $17 billion in assets and 117 branches. The combined company will have about $30 billion in assets and 235 branches. It will be the nation's fifth-biggest thrift, if Washington Mutual completes its American Savings Bank purchase to form the No. 4 thrift.

Perelman's New York-based holding company, Mac-Andrews & Forbes Holdings Inc., bought First Nationwide in 1994 from Ford Motor Co., which had acquired it in 1985. Since then, First Nationwide expanded in California and sold branches in other states.

Most of First Nationwide's branches are in Northern California; most of Cal Fed's are in Southern California.

Because there's little overlap between the two companies, First Nationwide will keep most Cal Fed branches open, Harshfield said, closing only about three or four.

"Perelman and [First Nationwide Chief Executive] Gerald Ford are doing what they set out to do, which is to buy assets cheap in California," said analyst Jim Marks of Hancock Institutional Equity Services. "My inference is they intend to sell them when the prices are more reflective of the values."

That could mean a sale of First Nationwide to another company, or a public offering, he added.

L While that's "possible," Ford said, he's not planning on it.

"Mr. Perelman and I are not as focused on exit strategies as people would have you believe," Ford said.

First Nationwide is buying a company almost as big as itself. It will issue debt to help pay for the purchase, Ford said, adding he doesn't know yet just how much.

The company already has several bond issues outstanding, which have noninvestment-grade, or "junk" ratings. In April, First Nationwide had to give investors a yield of 12.75 percent to sell $455 million in bonds, after initially asking them to accept a yield of 11.5 to 11.75 percent.

Those bonds haven't traded since speculation about the merger began last week, said Jeffrey Koch, a portfolio manager at Wisconsin-based Strong Capital Management.

A complicated feature of the merger agreement concerns how to divide potential winnings in a breach-of-contract suit Cal Fed is pursuing against the federal government. The companies agreed to give Cal Fed shareholders a new security to reflect a portion of the proceeds.

They will receive one new security for every 10 common shares they hold when the acquisition takes place. Last year Cal Fed issued a similar security whose holders will receive 25 percent of any winnings.

The merger agreement calls for First Nationwide to keep up to $125 million of any remaining lawsuit proceeds, while the holders of the new securities would get 60 percent of what's left, after expenses and taxes. The companies said they plan to complete the merger in the first quarter of 1997.

Ford said First Nationwide plans to cut the equivalent of 35 percent to 40 percent of Cal Fed's operating costs within a year.

Pub Date: 7/30/96

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