As Bank Mergers Resume, Cal Fed a Likely Candidate
Eighteen months ago, California Federal Bank seemed prime for a sale.
After all, the San Francisco-based thrift’s majority owners, which include corporate raider Ron Perelman, were known for building and flipping banking franchises. Cal Fed executives were hinting on Wall Street that a takeover was likely.
Out-of-state banks were itching to break into California, and Cal Fed--with 360 branches and $23 billion in deposits--was the only sizable institution with even the slightest interest in selling.
Yet to the surprise and disappointment of many investors, Cal Fed failed to attract a suitor. Interest rates began to rise, bank stocks dropped, and the buyers disappeared. It seemed as if Cal Fed had missed the window of opportunity as the financial consolidation craze cooled.
But lately there are signs that Cal Fed’s stalled efforts to find a buyer could soon get a jump-start.
* Bank mergers are back in style. The most recent evidence came last week when Chase Manhattan Corp. agreed to buy J.P. Morgan & Co. in a $35.6-billion stock swap--one of the biggest bank deals ever.
* Federal Reserve Board Chairman Alan Greenspan appears to be finished with his series of rate hikes for now, giving bank and thrift stocks a healthy bump.
* Perelman--who controls about one-third of Cal Fed’s parent, Golden State Bancorp--continues to suffer deep paper losses on his holdings in Revlon Inc. (down 70% over the last year) and Sunbeam Corp. (down 96% since 1998), which may motivate him to cash in his Cal Fed investment.
If a buying binge resumes, analysts are betting that Cal Fed will be one of the first institutions to go.
“It’s the last piece of real estate in California with a view of the ocean,” said bank analyst Jonathan Gray at Sanford C. Bernstein. “It’s a highly attractive acquisition.”
Cal Fed President Carl Webb said that no sale is imminent. The thrift is not talking to any potential bidders, nor has it hired investment bankers to shop the company around, Webb said.
“There is not a ‘for sale’ sign hung on this bank,” he said.
Webb acknowledged, however, that Perelman and his partner, Cal Fed Chairman Gerald J. Ford, have a history of buying and selling banks and thrifts.
“Ultimately, that will be the case here too,” Webb said. “Whether that will be six months or six years, I can’t say.”
Until that day arrives, Webb said he is running Cal Fed with a long-term horizon, investing in technology, reducing reliance on rate-sensitive mortgages and building a commercial lending operation almost from scratch.
“We want to look more like a bank than a thrift,” Webb said. “The bank model is more profitable.”
Lending to small and mid-size business is up 90% this year at Cal Fed, though the commercial business remains only a fraction of the thrift’s consumer deposits, according to Scott Kisting, a former Bank of America business banker who now runs Cal Fed’s retail and commercial divisions.
But for many small investors, the primary question is when the thrift will be sold. Speculation about a sale pops up almost weekly on Internet stock message boards.
“Nobody thought [Perelman and Ford] would keep it this long, and they probably would like to have sold it by now,” said Paul Miller, bank analyst at Friedman, Billings, Ramsey. “But Perelman doesn’t want to sell at distressed prices. When the next consolidation wave comes through, you are going to see Golden State right in the middle. I think it will sell within 12 to 18 months.”
With nearly $60 billion in assets, Cal Fed could fetch $4 billion to $4.5 billion, or $30 to $35 a share, analysts said. That would represent a hefty premium for investors from Golden State’s closing price Friday of $22.25 a share in New York Stock Exchange trading.
Certainly, a payoff is overdue for long-time Golden State investors. The holding company’s shares are up about 26% this year, but that’s still well below its 1998 peak of about $35 a share.
Perelman and Ford, who together control about half of Golden State, began investing in California in 1994 after successfully buying and selling a string of banks and thrifts in Texas.
Hoping to replicate their lucrative Texas strategy, the pair bought San Francisco-based First Nationwide Bank from Ford Motor Co. and began a buying spree to build market share in California. In 1997, they acquired Cal Fed and adopted the thrift’s name. In September 1998, they closed a $1.8-billion merger with rival Glendale Federal Bank, creating the nation’s No. 2 thrift.
It was thought to be Perelman and Ford’s crowning achievement. The next logical step would be flipping the company to a new owner. But the timing was bad.
Giant institutions such as Bank of America, Wells Fargo and Washington Mutual were preoccupied with digesting their own big deals, most of which closed in 1998.
At the same time, rising interest rates caused bank stocks to sink, robbing potential buyers of the currency they use to make acquisitions.
Deals to buy banks and thrifts plunged from more than 500 in 1998 to 154 this year, as of Sept. 6, according to figures by Carpenter & Co.
But after a long drought, some deals are starting to appear again. In addition to the Chase-Morgan deal, Citigroup this month said it will pay $31 billion for consumer finance lender Associates First Capital. In August, Washington Mutual announced it will buy Bank United Corp. in Texas for $1.5 billion.
Ford, the 56-year-old chairman and chief executive of Golden State, said that as big banks start to worry about future growth, they will resume their acquisitions to boost revenue and improve efficiencies. And managers at Cal Fed are telling Wall Street professionals that they expect merger activity to start picking up again by the end of this year or in early 2001.
But Ford also cautioned he’s in no hurry to sell. “I’m not anticipating anything soon,” Ford said.
Likewise, he said Perelman, whose personal fortune has dropped by nearly $3 billion since 1997, is not pushing for a sale.
Perelman declined to comment for this article.
Meanwhile, Golden State is pursuing its giant claim against the U.S. government for a controversial accounting rule change that nearly put Glen Fed out of business in the 1990s. The thrift was awarded a whopping $909 million last year, but the government is appealing. Analysts say the government lawsuit probably won’t impact a possible sale.
More important to Cal Fed is who might emerge as a buyer.
“The Glen Fed acquisition gave them a critical mass in California, but it also made them so huge that no on else could acquire them without turning into a thrift,” said Charlotte Chamberlain of Jefferies & Co. in Los Angeles. “Perelman has aspirations to be acquired by a bank, but banks aren’t all that interested in thrift assets these days.” Because of their traditional focus on mortgages and savings accounts, thrifts have lower returns and slimmer net interest margins than commercial banks.
Even U.S. Bancorp’s Jack Grundhofer, one of California’s most aggressive bank-shoppers, said he is not interested in thrifts such as Cal Fed. “The basic business and spreads are so different,” Grundhofer said this year. “I don’t know how you’d get the payback.”
The only thrift large enough to swallow Cal Fed is Seattle-based Washington Mutual, which acquired three other large California thrifts in the late 1990s. But combining the nation’s No. 1 and No. 2 thrifts could run afoul of regulators, analysts say.
Another dark horse might be Wells Fargo Bank. Purchasing Cal Fed could be a defensive move for Wells Fargo to keep new rivals away. And because both institutions have sizable California operations, cost-cutting opportunities are considerable. But like U.S. Bancorp, Wells Fargo might be loathe to load its balance sheets with lower-performing thrift assets.
Perhaps the strongest interest will come from outside the state, or from another country. The Netherlands-based ABN-AMRO Holdings, Germany’s Deutsche Bank and HSBC Bank in Britain have expressed interest in the U.S. or California market. The Japanese parent of Union Bank of California has also expressed a desire to grow in California.
Analysts have little doubt that a buyer will emerge. “If you want to be a player in California,” analyst Miller said, “what else are you going to do?”
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Not So Golden
Despite a jump this year, shares of Golden State Bancorp are lagging well below their mid-1998 highs. The stock could rise further if the recent comeback of bank mergers is a signal that the long-awaited buyout of the San Francisco-based parent of California Federal Bank may finally happen.
Cal Fed at a Glance
* Parent: Golden State Bancorp
* Headquarters: San Francisco
* Assets: $60 billion
* Branches: 360 in California and Nevada
* Leadership: Gerald J. Ford, chairman and chief executive; Carl Webb, president; Scott Kisting, head of retail and commercia operations
* Major stockholders: Ronald Perelman, 35%; Gerald J. Ford, 15%
Source: Bloomberg News, company reports
