Citadel Investor Asks Liquidation but Firm Digs In

James Cotter has a history of making waves in other peoples’ pools. Now he’s getting a taste of his own medicine.

Cotter, 58, heads Craig Corp., a Los Angeles firm that is basically a shell through which Cotter has invested in numerous other businesses over the years. He also manages the Forman family fortune, a $300-million-plus portfolio (as estimated by Forbes magazine) built from profits of the family’s giant Pacific Theatres movie theater chain.

While Cotter gained a reputation in the 1980s as a savvy corporate raider with a sharp eye for value--particularly in real estate--the 1990s have not been as kind to him. Craig shares, which traded above $20 in 1989, now sell for $10.875 on the New York Stock Exchange. And one of Cotter’s big investments, Citadel Holding Corp. (which he chairs), has virtually collapsed since 1990.

Seared by Citadel’s plunge, one of its shareholders--a Columbus, Ohio, investor named Roderick H. Dillon--has launched a proxy battle to challenge Cotter’s effective control of Citadel. Characteristically, Cotter is spoiling for a fight.

Glendale-based Citadel was the holding company for Fidelity Federal Bank. Like many S&Ls;, Fidelity suffered severe losses in California’s real estate crash. As a result, Fidelity took a huge write-off this year and, with regulators’ OK, was recapitalized in August with a $108-million infusion from new investors.

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But that recapitalization cost Citadel dearly. Its 100% ownership of Fidelity dropped to a 16% stake--the major reason Citadel’s shares have tumbled. Today, Citadel’s only substantial assets consist of its Fidelity stake, four real estate properties and options on two other properties.

Dillon, who says he has invested in several California S&Ls; as “turnaround” situations since the 1980s, began buying Citadel shares in January. He now owns about 650,000 shares, or 9.7% of the total, at an average cost of $5.80 each. With the stock at $3.75 on Tuesday on the American Stock Exchange, Dillon is underwater. So is Cotter.

“Clearly, the value of the company is a lot less than I had anticipated,” Dillon admits. Yet he also thinks Citadel stock isn’t fully reflecting the value of the stake in the recapitalized Fidelity. What’s that worth? All investors can do is guess until Fidelity files its latest financial statements next week, providing a post-recap picture of the S&L.;

One clue to Fidelity’s value, however, is that the investors who recapitalized it paid $5.25 a share in August. Those investors include such respected players as Omega Partners and Mutual Shares Corp. Dillon figures it this way: With $3.7 billion in assets and 33 branches, a now-healthy Fidelity is a certain takeover candidate for a bigger S&L.; For their trouble, the recap investors would probably expect to at least double their money. Put a $10 takeover value on Fidelity shares (which trade only privately), and that makes Citadel’s 4.2 million shares of Fidelity worth $42 million. Which in turn figures out to $6.36 per Citadel share.

That’s hypothetical, of course. In any case, rather than let the market value Citadel’s “intermediary” role as a Fidelity investor, Dillon has what he thinks is a better idea: Liquidate Citadel, distributing the Fidelity shares to Citadel holders on a prorated basis. To that end, Dillon is putting up his own slate of directors for Citadel’s Dec. 12 annual meeting. And he has enlisted the help of Bradley C. Shoup, a partner with La Jolla-based corporate raider David Batchelder.

What does Cotter think of liquidating Citadel? Citadel CEO Steve Wesson says only that “we don’t feel it’s in the best interests of shareholders.” And in a clear sign of Cotter’s intention to fight, in late October Citadel issued 74,300 new shares to Craig Corp., raising Craig’s Citadel stake to 10%.

Because of a formality in S&L; regulations, that move paves the way for Craig to quickly boost its stake in Citadel before the annual meeting, Dillon says. The goal, he contends, would be to thwart his proxy fight. On Monday, Dillon filed suit against Cotter and Craig Corp., charging that Citadel’s new share issuance to Craig was improper and designed to “enable (the defendants) to maintain themselves in office . . . and to impede the voting rights of Dillon and other stockholders of Citadel.”

In calling for Citadel’s liquidation, Dillon says he’s just interested in realizing his investment’s true value. If Cotter has a better idea--a good reason why Citadel needs to exist--Dillon wants to hear it. Craig Corp. holders, who also have seen little value realized since 1989, might be asking the same question about that Cotter entity.

Citadel’s Slide

How shares of Glendale-based Citadel Holding Corp. have fared since 1991 (end of quarter figures, except latest):

Tuesday: $3.75