Valley Federal Takes New Tack to Counter Citadel Takeover Ploy : Federal Agency Asked to Reject Hostile Maneuver

For four months, Valley Federal Savings & Loan has been trying to block a takeover bid from Citadel Holding Corp. The savings and loan, based in Van Nuys, rejected Citadel’s buyout offers, sought friendly investors and held merger talks with other S&Ls.;

Some of the maneuvers came under the direction of Donald C. Headlund until he stepped aside as Valley Federal’s president and chief executive in November. His duties were taken over by four Valley Federal officials, including chairman Joseph R. Biafora.

But they haven’t been able to shake Citadel’s attention. Citadel has options and commitments from several stockholders to buy 39.2% of Valley Federal’s stock, and is using those agreements as a first step toward acquiring Valley Federal.

Citadel is the Glendale-based parent of Fidelity Federal Savings & Loan, which has 30 offices and $3.8 billion in assets. Citadel’s management figures that a merger with Valley Federal would dramatically expand its presence in California’s S&L; market.

$3.3 Billion in Assets

So Valley Federal, the San Fernando Valley’s biggest S&L; with $3.3 billion in assets, has hit upon a new defensive tack. It now claims Citadel already has effective control of it.

By that, Valley Federal does not mean that Citadel executives stormed its headquarters or that Fidelity Federal tellers now work in Valley Federal’s 47 branches. The company maintains that Citadel, by lining up such a big block of its shares, has usurped Valley Federal’s ability to make choices--such as whether to stay independent or seek another partner.

Why would incumbent managers publicly admit losing control of their company, especially to a bidder that has yet to actually purchase even a minor share of the company’s stock?

Valley Federal hopes that if it can convince federal regulators that Citadel already has seized effective control, Citadel will be found to have broken a law that requires federal approval before control of an S&L; changes hands. If Federal Home Loan Bank Board regulators agree, they could reject Citadel’s takeover attempt.

That was the argument made by Valley Federal in a 136-page report it filed Feb. 12 with the FHLBB, the agency that regulates the nation’s savings and loans. The filing was in response to Citadel’s application to the FHLBB asking that it be allowed to exercise its options and actually buy the 39.2% of Valley Federal.

All of the filings and cross-filings are a major reason why a Citadel takeover of Valley Federal, if it happens, isn’t likely to happen soon. Hostile takeovers for S&Ls; are rare, in part because each side can argue its case to the FHLBB before the agency rules on whether the deal can proceed. The process can take several months, which is more time than most hostile bidders care to spend.

As a result, there aren’t a lot of past examples of S&L; takeover fights shedding light on how the FHLBB will rule in this case. And that has left other S&L; and bank executives split on the potential success of Valley Federal’s strategy.

John J. Keating, president of Lincoln Bancorp in Encino, said until Citadel “actually exercises the stock options, they don’t have anything” in terms of controlling Valley Federal. “Obviously,” Citadel isn’t “influencing policy by the very fact that Valley Fed is objecting” to Citadel’s bid, which “seems to throw that argument in the garbage,” he said.

But Richard G. Voll, chief executive of Investment Savings & Loan in Woodland Hills, said if Valley Federal can show that Citadel already is having strong influence on the company, Citadel has “effectively gotten control without the bank board’s permission; I would think it’s a valid argument.”

Gerald S. Haims, an S&L; analyst with Seidler Amdec Securities in Los Angeles, said: “At this point, it’s really a guessing game what the bank board’s likely to do. I don’t recall a situation quite like this.”

Valley Federal also contends in its filing that Citadel, despite being publicly held, is controlled by one of its directors, Los Angeles businessman James J. Cotter, and his affiliated companies. Moreover, the affiliates’ influence at Citadel makes them unregistered S&L; holding companies--that should face the same scrutiny by the FHLBB as Citadel, Valley Federal alleged.

Cotter, 50, and his allies own only 18.9% of Citadel’s 3.4 million common shares outstanding. But Citadel’s board also has the power to vote an additional 21.6% of the stock owned by Tucson Electric Power Co., Citadel’s biggest shareholder, under a previous “standstill” agreement that was designed largely to prevent Tucson Electric from making a hostile bid for Citadel.

The upshot is that “since Cotter and the Cotter group control Citadel’s board, they have the assured support of 40.5% of Citadel’s outstanding common stock,” Valley Federal maintained.

Valley Federal also noted that the stockholders who already have granted Citadel an option or commitment to buy their Valley Federal stock include Hecco Ventures, an investment partnership of which Cotter is a general partner. Hecco owns 9.9% of Valley Federal’s shares.

In separate telephone interviews, Cotter and James A. Taylor, Citadel’s chairman, asserted that Cotter does not control Citadel. But both declined to comment further on Valley Federal’s allegations until Citadel files a response with the FHLBB.

Citadel has made one formal proposal to buy all of Valley Federal. On Jan. 14, it offered $107.3 million, or $18.50 a share, and said it might raise the price if it first could review the S&L;’s books. Valley Federal said no thanks.

A week earlier, Valley Federal had said it was discussing a possible merger with an unidentified S&L; in California, which industry sources said was Home Federal Savings & Loan in San Diego. That announcement pushed Valley Federal’s stock above $21 a share, but, since then, no merger agreement has surfaced and the stock has fallen back, closing Monday at $17.25 a share in over-the-counter trading.

In its bank board filing, Valley Federal said other potential partners--which it did not identify--had told Valley Federal that they were “reluctant to proceed without the acquiescence of Cotter and Citadel” and that any offer would require “significant conditions” to “counteract anticipated challenges” by Cotter and Citadel.

Which is not to say that Cotter and Citadel would try to block all other bids, said analyst Haims. If another S&L; “came in and offered something that represented a substantial profit to these (Citadel) people, they might grab it,” he said. “They’re investors.”