1st Nationwide Buying Cal Fed for $1.2B Cash

First Nationwide Bank on Monday announced a $1.2 billion agreement to acquire Cal Fed Bancorp - the second transaction at that price within a week that promises to alter the California financial landscape.

Analysts said First Nationwide's all-cash deal - it includes a complicated plan to share any proceeds forthcoming from Cal Fed's lawsuit against the U.S. government - rewards Cal Fed shareholders handsomely. They said it could spur other thrift mergers within the state and, later, purchases of these larger institutions by out-of-state commercial banks.

"We're clearly in a long-term takeover wave for California S&Ls," said Smith Barney Inc. analyst Thomas O'Donnell.

Eight days ago, Washington Mutual of Seattle announced it would buy the privately held American Savings Bank of Irvine, Calif., for $1.2 billion of stock.

"The smart-money players are buying up the assets today with the expectation that the scarcity value in California will increase," said Lehman Brothers Inc. analyst Bruce Harting.

The post-merger First Nationwide, which is controlled by Ronald O. Perelman's MacAndrews & Forbes Holdings Inc., would be the nation's fourth-largest thrift institution, with assets of $32.3 billion.

The thrift will be run from First Nationwide's operating headquarters in San Francisco. (The corporation is officially based in Plano, Tex.)

The merged thrift would have 229 California branches and vie with Union Bank of California, American Savings, and Golden West Financial Corp.'s World Savings and Loan Association for fifth place among the state's depository institutions. Bank of America, Wells Fargo Bank, H.F. Ahmanson & Co.'s Home Savings of America, and Great Western Bank are the top four.

The First Nationwide-Cal Fed deal brings together two traditional thrift operations in a state where other big thrifts are trying to develop a more- banklike service mix.

With a price pegged by Montgomery Securities Inc. analyst Joseph Jolson at 1.7 times tangible book value, 18 times fully taxed earnings in 1997, and a 5.5% deposit premium, the deal sets a high-water mark in the current thrift acquisition wave.

Washington Mutual agreed to 1.54 times book value, 8.3 times earnings, and a 3.3% premium for American Savings.

"It was a pretty good deal overall for Cal Fed shareholders," Mr. Jolson said.

The pricing is even more remarkable given that Cal Fed was near collapse in the early 1990s, hurt by rising real-estate losses and economic woes in California.

The acquisition fulfills the California ambitions of Ronald Perelman, First Nationwide chief executive officer Gerald J. Ford, and Cal Fed CEO Edward G. Harshfield.

Mr. Harshfield's plan since joining Cal Fed in 1993 was to shed problem assets, raise new capital, and eventually sell Cal Fed at a premium. While some criticized his strategy as excessively dilutive, analysts said Mr. Harshfield confounded his critics with the attractive terms of the First Nationwide sale.

"It feels great to do the right thing for our shareholders and for the First Nationwide organization," Mr. Harshfield said.

He added that the merger negotiations never touched on the issue of whether or not he and his senior executives will stay on. Most outside observers expect Mr. Harshfield to leave.

Mr. Ford and Mr. Perelman have been eager to grow in California ever since they teamed up to buy First Nationwide from Ford Motor Co. in 1994.

Their plan was to sell the thrift's non-California branches and buy within the state. To date they have sold 105 branches in four states, completed a Bay Area thrift acquisition and several branch purchases, and made the Cal Fed deal, which is expected to be consummated in 1997's first quarter, pending approvals from regulators.

As of June 30, First Nationwide had 72 branches in Northern California, 17 in Southern California, 24 in Florida, and three in Texas.

Most observers expect Mr. Perelman eventually to sell First Nationwide. But in an interview, Mr. Ford said that may not be necessary. The company is one of the most profitable thrifts, with a return on equity of 24% for the quarter ending in December.

The Cal Fed acquisition, which will be accompanied by cost-cutting of 35% to 40% of its expense base, will further boost the company's earnings, Mr. Ford said. Most of the cost cuts are to come from data processing and the headquarters offices. There are few branch overlaps, since Cal Fed is concentrated in Southern California.

Mr. Ford added that he thinks the combined company can do fine sticking with the basics of taking certificates of deposit and making mortgage loans. Neither First Nationwide nor Cal Fed has been as high-profile in pursuit of a more banklike service mix as Glendale Federal Bank, Great Western, or Home Savings. Nor do they have to be, he said.

Mr. Ford also said that the company remains on the prowl for fill-in acquisitions that would beef up its California network.

"I wouldn't say this is the last acquisition we will do," he said.

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