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First Nationwide Agrees to Buy Cal Fed in Thrift Merger

July 29, 1996

LOS ANGELES (AP) _ Cal Fed Bancorp agreed Monday to be acquired by First Nationwide Holdings Inc., billionaire Ronald Perelman’s thrift holding company, in a nearly all-cash deal worth more than $1.2 billion.

The merger will create the nation’s fourth largest savings and loan with about $30 billion in assets and 235 retail branches. The merged company will be based in San Francisco.

Few branch closures are expected; San-Francisco-based First Nationwide Bank operates mainly in Northern California and California Federal Bank mainly in Southern California and Nevada.

Cal Fed stockholders will receive $23.50 per share under the merger, which is expected to close early next year. On the New York Stock Exchange, Cal Fed shares rose $1.25 to $22.62 1/2 on the news.

The deal continues a national consolidation of financial services companies and is the second major merger involving a California thrift in the past two weeks. Last week Seattle’s Washington Mutual Inc. agreed to buy American Savings Bank in Irvine, Calif., for $1.2 billion.

Despite high-profile deals like Security Pacific Corp.’s takeover by BankAmerica Corp. and First Interstate Bancorp’s by Wells Fargo & Co., the pace of mergers had been slower in California than in many parts of the nation.

With the California economy mending along with the portfolios and balance sheets of the state’s S&Ls, more deals are expected. Banks looking to expand into the nation’s largest financial marketplace include Minneapolis’ First Bank System and Norwest Corp., and Charlotte, N.C.-based NationsBank.

``What’s occurred in the nation over the past four or five years has now started to take place in California,″ said Todd Pitsinger, an analyst at Friedman, Billings, Ramsey & Co., an Arlington, Va., investment bank that helped CalFed raise money to avert a government takeover in 1993 and 1994.

Beset by falling real estate prices, competition from non-traditional mortgage lenders, and with bad loans and foreclosures twice as high as its peers, CalFed sold more than $265 million in preferred stock to survive while it worked out its problems.

The decision to recapitalize was made by S&L turnaround specialist Edward G. Harshfield, who was hired in October 1993. Harshfield considered the merger prospects then, including a proposal from Oakland’s Golden West Savings that he said was laughably low.

Golden West had offered to acquire CalFed for ``tangible book value″ minus whatever money was needed to cover its bad loans.

Harshfield noted that First Nationwide has agreed to pay nearly 1.8 times CalFed’s tangible book value, more than the 1.6 times book value that Washington Mutual paid for American Savings.

Analysts said First Nationwide paid the premium because of two special benefits besides the near-perfect geographic fit with CalFed. First, it has more previous losses than it can quickly write off against its own current profits, so it gets a big tax break from CalFed’s profits.

And First Nationwide also retains an interest in any settlement CalFed reaches with the federal government over changes in accounting rules that were made in the 1989 S&L bailout legislation. The Supreme Court recently upheld the right of savings and loans to sue the government over the changes.

Cal Fed, one of scores of thrifts that have sued the government over the changes, was forced to write $485 million off its books over five years instead of 40 years as a result of the changes.

In addition to the $23.50 per share, CalFed shareholders get securities allowing them to share in any settlement or court award stemming from the litigation. Those securities are now worth about 50 cents a share, but could wind up being worth $2 or $3 a share by 1998 if the lawsuit is settled favorably, said Friedman, Billings analyst Pitsinger.

Layoffs are expected among CalFed’s headquarters and back office staff. Harshfield said he had negotiated severance pay of three weeks for every year worked up to a maximum of a year’s pay to cushion the blows for those employees.

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