CalFed Bank Agrees to $1.2-Billion Takeover

Turning up the competitive pressure in the state’s thrift industry and portending further mergers, California Federal Bank’s parent company agreed Monday to a $1.2-billion takeover by First Nationwide Holdings that would create the state’s third-largest thrift.

The proposed deal, the second for a California-based thrift in a week, would create an institution with $31 billion in assets and a statewide branch system.

The transaction, expected to close early next year, would catapult the combined First Nationwide and CalFed Bancorp to a position just behind market leader H.F. Ahmanson & Co., parent of Home Savings of America, and Great Western Financial, parent of Great Western Bank, in the competition for deposits and borrowers.

Executives downplayed the number of layoffs or branch closures that might result. First Nationwide said branch closures would be in the “single digits” because most of its branches are in Northern California and most of CalFed’s are in Southern California. Customers of either institution would see little, if any, change in their accounts or services, executives said.

One big question is the fate of the 300 or so employees at CalFed headquarters in the Mid-Wilshire district. The merged bank would be based in San Francisco, but it is likely there would be a Los Angeles office as well, although First Nationwide has not decided that yet.

Under terms of the proposed takeover, which is subject to regulatory and shareholder approval, First Nationwide is offering a cash price of $23.50 per share, plus an additional security that would spin off the expected value of proceeds from CalFed’s claim against the federal government in a breach-of-contract lawsuit.

CalFed shares rose $1.25 to $22.625 on the New York Stock Exchange on Monday.

For San Francisco-based First Nationwide, parent of First Nationwide Bank, the deal would mark the biggest--though probably not the last--in a string of acquisitions aimed at turning it into a major player in the industry.

“We’re excited about the transaction,” said Gerald J. Ford, chairman and chief executive of First Nationwide Bank. “We have almost doubled the size of the company, but more importantly, we’ve enhanced the franchise of the combined companies.”

First Nationwide was purchased in 1994 by New York financier Ronald Perelman’s MacAndrews & Forbes Holdings from Ford Motor Co.

Gerald Ford intimated that the merged bank would operate under the CalFed name. “We think the CalFed name has a lot of franchise value to it, so we could rename First Nationwide branches,” he said.

The proposal also marks a high point in CalFed’s comeback, under the stewardship of President and Chief Executive Edward G. Harshfield, from the brink of insolvency.

“In March 1994, when our common stock was trading at $9.50 per share and our management was tackling the major issues of our restructuring, we promised stockholders value for their investment,” Harshfield said in a statement. “Today, we are keeping our promise.”

Word of the merger plan comes a week after the announcement that Washington Mutual Inc. would take over Irvine-based American Savings Bank in a deal valued at about $1.4 billion.

The CalFed takeover would make it the fourth-largest thrift in the country, after Home Savings, Great Western and the merged Washington Mutual/American Savings.

Analysts praised the deal.

“First Nationwide gets a tremendous deposit base and mortgage originator to complement their Northern California franchise,” said Todd Pitsinger, Southern California thrift analyst with the investment banking firm Friedman, Billings, Ramsey & Co. in New York. “In one fell swoop, it puts them in a position to compete with the big guys on a daily basis.”

First Nationwide has $17 billion in assets and 117 branches in California, Florida and Texas, including 73 in Northern California. Its Maryland-based First Nationwide Mortgage Corp. subsidiary originates mortgage loans, primarily on a wholesale basis, in 44 states.

CalFed has $14.3 billion in assets and 125 branches and loan offices, including 88 in Southern California.

The merger plan is likely to increase the pressure on smaller thrifts to find partners, fueling the predicted consolidation of the former savings and loan industry here, analysts said.

“Is this the starting gun on a consolidation race?” said Charlotte Chamberlain, an industry analyst with Wedbush Morgan Securities in Los Angeles. Harshfield “said it’s just a coincidence of closings,” Chamberlain said. “But it puts a lot more pressure on the smaller thrifts . . . if not to merge, then to figure out and focus on their strategy” and cost cutting.

In particular, the two thrift deals focus attention on Glendale Federal Bank and Coast Savings, both mid-size institutions with branches throughout the state, analysts said.

Details of how the merged CalFed/First Nationwide would operate are still being worked out.

One big question is whether Harshfield, who won praise from the investment community for strengthening CalFed’s balance sheet, would remain in active management.

Harshfield declined to speculate, saying only: “It is clearly Mr. Ford’s show. He’s the guy writing the check.”

Ford left the door open. “Ed was insistent in the negotiations that we not talk about him,” he said. “Now that there’s a definitive agreement, it’s appropriate for Ed and me to talk.

“Clearly he’s done a fantastic job with the company, and I have a high regard for him professionally,” he added. “We would hope we could find the appropriate place for him.”

Analysts have speculated that Perelman and Ford are building up First Nationwide in order to sell it later. Ford, who holds a 20% stake in First Nationwide, downplayed such speculation.

“I don’t think Mr. Perelman and I are as focused on an exit strategy as people assume,” he said.

As for future acquisitions, he said: “This is a pretty big deal for us. . . . It’s one thing to acquire things--then you’ve got to run them. . . . But I doubt this is the last thrift we buy in California.”

CalFed stands to benefit from a recent U.S. Supreme Court ruling in favor of several thrifts that sued the federal government to recover damages in a breach-of-contract lawsuit stemming from an accounting change forced on the thrifts in the 1989 bailout law.

CalFed won’t say how much it will be claiming in damages, but they are likely to mount into the hundreds of millions of dollars.

The bank has already spun off 25% of the value of that eventual windfall in the form of special certificates traded on Nasdaq.

Under terms of Monday’s merger announcement, new certificates will be issued for 60% of the remaining value, minus expenses, taxes and $125 million to be retained by the merged bank. One certificate will be issued for every 10 common shares held.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Who Would Be Affected?

The proposed takeover of California Federal Bank by First Nationwide Bank would affect a variety of groups:

Customers:

Clients should notice little change in services, products or policies at first as First Nationwide digests CalFed. First Nationwide branches could be renamed CalFed branches. A few redundant branches may be closed.

Shareholders:

CalFed shareholders would get $23.50 in cash for each of their common shares, plus a certificate for a portion of the expected windfall from CalFed’s claim against the federal government. Holders would get one certificate for every 10 common shares they hold.

Employees:

Workers at redundant branches could lose their jobs, but the most likely to be affected are workers at CalFed’s Los Angeles headquarters. The merged bank would be based in San Francisco; it’s unclear whether First Nationwide would retain an L.A. administrative office.

Competitors:

The merger would put pressure on smaller thrifts to find economies of scale or merger partners of their own.