Possibly clearing the way for its sale to an acquisitive Seattle thrift, Coast Savings Financial Inc. has reportedly decided to spin off to investors its potential winnings from a goodwill lawsuit.
A market source said Los Angeles-based Coast would follow the lead of California Federal Bank, which in 1995 distributed securities to its shareholders entitling them to one-quarter of any damages won in Cal Fed's suit against the federal government over accounting for goodwill in acquisitions of troubled thrifts in the 1980s.
The move would let Washington Mutual Inc., which has made clear it intends to build its California franchise, buy the $8.5 billion-asset Coast without having to haggle over its potential winnings in setting the price.
Cal Fed and Coast are among more than 125 thrifts that have sued on the goodwill issue. The Supreme Court sided with the thrifts in July, but the amount of damages is still to be determined.
Ray Martin, Coast's chief executive, declined to discuss its thinking on spinning off its potential winnings. The thrift is "evaluating all the ramifications and value of the goodwill decision and has not reached any final decision," he said.
The source said Coast's unwillingness to separate the value of the potential damage award from its basic franchise value had stalled earlier talks with Washington Mutual.
"It would definitely increase the attraction of a company like Coast to ... separate the company's worth in takeover versus what it may get in a lawsuit," said analyst Thomas O'Donnell of Smith Barney, because "nobody knows how to value the goodwill suits."
Cal Fed's arrangement is credited with having simplified its purchase this month by First Nationwide Bank, Plano, Tex.
Talks between Coast and Washington Mutual will resume in earnest this week as the Seattle thrift's chief executive, Kerry Killinger, returns home after a cross-country road show for investors, the market source said.
During the road show, Mr. Killinger has stressed that his thrift is intent on expanding its reach in California.
An industry source said Washington Mutual has been doing a due diligence review of Coast's portfolio for about 30 days. Although a deal with Coast now appears likely, the source said, Washington Mutual is prepared to turn its attention to Great Western Financial if it can't strike a deal with Coast.
Speculation about a deal helped lift Coast's stock an astonishing 10.03% last week, to $39.75, and Great Western's stock 7.76%, to $31.25.
"Talk about 'irrational exuberance.' We're seeing a little of it in Coast," said Charlotte Chamberlain of Wedbush Morgan Securities, Los Angeles. Coast's stock would take a big hit if Washington Mutual were to clearly indicate it was not interested, she said.
JoAnn DeGrande, vice president of investor relations at Washington Mutual, declined to say whether it is talking again to Coast. But she said Mr. Killinger has been open about his ambitions in California.
Meanwhile, Coast's lead lawyer on the goodwill case, Charles J. Cooper of the Washington law firm of Cooper & Carvin, acknowledged that the thrift got some very good news last week on the lawsuit.
In a Jan. 13 filing, the federal government admitted it had broken its contract with Coast in 1989 by requiring the thrift to void $300 million of goodwill in a capital credit. The admission was the first by the government, putting "Coast ... in the best position of any case I know," Mr. Cooper said.