Perelman Lucky to Have Citigroup

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Perelman Lucky to Have Citigroup

Commentary. David Wilson is a columnist for Bloomberg News. The
opinions expressed are his own.


By David Wilson

Princeton, New Jersey, May 24 (Bloomberg) -- Citigroup Inc.'s
agreement to buy Golden State Bancorp for cash and stock valued
at $5.8 billion came at a rather opportune time for XXXXX
Perelman, the thrift's controlling shareholder.

Perelman has raised $426.4 million since December 2000, through
borrowings secured by about half his stake, according to filings
made with the U.S. Securities and Exchange Commission. He
obtained the money from Credit Suisse First Boston by agreeing to
sell shares or pay an equivalent amount of cash at a later date.

Fifteen of the so-called forward sales have been arranged. The
first two come due in December -- about the same time that
Citigroup plans to complete its purchase of Golden State, the
second-largest U.S. thrift.

Terms of the sales suggest that Perelman, the billionaire
chairman of Revlon Inc., will have to share some of the rewards
from the takeover with Credit Suisse. When one considers how he's
fared the past few years, though, that may not count for much.

Revlon's stock price has fallen 91 percent since April 1998.
Sunbeam Corp. shares that he received four years ago in a
takeover are almost worthless. His April 2001 sale of a stake in
Panavision Inc. to M&F Worldwide Corp., another company that he
controls, led to lawsuits that he has yet to settle.

Better Than Peers

Perelman has fared relatively well in the thrift industry, which
he entered in 1988 by purchasing five failed savings and loans in
Texas from the federal government.

During the next decade, he parlayed that investment into
ownership of the fourth-largest U.S. thrift, California Federal
Bank. Perelman had 80 percent of the stock; the rest belonged to
Gerald Ford, its chairman and chief executive officer.

Golden State came under Perelman's control in September 1998,
when the thrift and California Federal completed what they called
a ``reverse merger.'' The $1.9 billion transaction gave him and
Ford a 45 percent stake in the combined company. Ford became
chairman and CEO, and still serves in those positions.

Shares of the San Francisco-based company, whose Cal Fed unit
ranks second only to Washington Mutual among U.S. thrifts, gained
95 percent between the completion date of the acquisition and the
disclosure of Citigroup's proposed purchase.

The advance exceeded the 77 percent rise during the same period
for the Standard & Poor's MidCap 400 Index, which includes Golden
State. A measure of the largest U.S. banks and thrifts, the
Philadelphia KBW Bank Index, gained just 35 percent.

Couple of Sales

Perelman started out with a 32 percent stake in Golden State. His
holding reached 37 percent in December 1999 because the thrift
repurchased shares from other investors and paid out more stock
to him and Ford in connection with the takeover.

In May 2000, Golden State made another acquisition-related stock
payment. Perelman received 3.91 million shares -- and sold them
all a week later for $16.25 each, according to SEC filings.

The $63.5 million sale was followed three months later by another
one that raised $48 million. Perelman sold 2.55 million shares at
$18.81 apiece. That left him with 42.9 million shares, or 32
percent of the stock outstanding.

Since then, his stake hasn't changed. He just agreed to vote all
the shares in favor of Citigroup's offer. The world's largest
financial-services company plans to pay about $16.40 in cash and
0.5234 share for each share of Golden State, whose holders will
have the right to choose either cash or stock within limits.

Perelman could make that pledge because he chose to raise money
through the forward-sale contracts with Credit Suisse First
Boston, the investment-banking unit of Switzerland's Credit
Suisse AG. The agreements effectively enabled Perelman to borrow
against his Golden State stock, rather than just selling.

Setting the Limits

Each contract specifies the number of shares to be sold, the sale
price and the timing -- 18 months or two years, depending on the
contract -- and give him the option of repaying cash instead.

The first, and largest, of the 15 agreements can serve as an
illustration. In December 2000, Perelman arranged to sell as many
as 3 million shares and received $65.4 million. Terms of the two-
year contract included a minimum price of $26.50 a share, and a
maximum of $31.80, for the future sale.

Perelman would only have to pay the 3 million shares, or the cash
equivalent, if Golden State traded for less than $26.50 when the
contract matured this December.

If it was between the lower and upper limit, the payment would
total $79.5 million, equivalent to the stake's value at the
minimum price. It would exceed that amount if the market price
was above the maximum.

Another two-year agreement, covering about 1.3 million shares,
was reached in December 2000. Subsequent contracts were signed
between March 2001 and last month; they ranged from 415,000 to 2
million shares, according to SEC filings. He arranged to sell a
total of 20.1 million shares, or 47 percent of his stake.

The Right Problem

The maximum price in eight of the contracts is less than what
Citigroup offered: $40.09 for each share of Golden State, based
on the proposed mix of cash and stock and Tuesday's closing price
for the acquirer's shares.

Under terms of the contracts, Perelman would be obligated to pay
additional amounts to Credit Suisse as a result. The payment on
the first contract, for example, would total $104.4 million.
That's $24.9 million more than the specified sale price.

Then again, investors in other companies tied to Perelman might
wish they had that kind of problem. Revlon's stock, which peaked
at $56.38 four years ago, closed yesterday at just $4.89. The
plunge reflects falling sales and mounting losses.

Sunbeam collapsed after buying his stake in Coleman Co., a maker
of camping gear, for cash and stock. The consumer-products
company buried itself under $1.7 billion of takeover-related debt
when Albert Dunlap was chief executive, and filed for bankruptcy
in February 2001. Its shares closed at 12.5 cents yesterday.

Finally, there's the case of M&F Worldwide. The producer of
licorice extract bought Perelman's stake in Panavision, a movie-
camera maker, for $128 million -- four times its market price.
Last week, a Delaware judge rejected a proposed $14.8 million
settlement of lawsuits related to the transaction.

Take all that into account, and the timing of Citigroup's
purchase of Golden State looks even more auspicious.