Valley Federal Will Let Citadel Make a Proposal : Deal Uncertain, but 2 Sides Set Ground Rules on Talks; Price Pegged to Ailing Unit

Valley Federal Savings & Loan and its once-hostile suitor, Citadel Holding, sent out a strong signal Tuesday that they are moving closer to an agreement in which Citadel would buy Valley Federal.

The two companies disclosed in a joint statement that they have agreed to ground rules allowing Citadel, the Glendale-based parent company of Fidelity Federal Savings & Loan, to make a formal offer for Valley Federal, a Van Nuys savings and loan that is the largest financial institution based in the San Fernando Valley, with $3.4 billion in assets as of Sept. 30. Citadel had assets of $4.3 billion on the same date.

Both Valley Federal and Citadel cautioned that there is no assurance that a deal will be struck or that regulatory agencies would approve a merger. Still, the disclosure is the clearest sign yet that the two sides are moving to resolve Citadel’s yearlong pursuit of Valley Federal.

“The dance is beginning,” said David Fleming, Valley Federal’s general counsel.

In January, Citadel offered $112 million, or $18.50 a share plus a $2-a-share premium for certain options, for Valley Federal. After reviewing the S&L;’s books, however, Citadel said in May that it no longer believed that it was worth that much in cash, citing uncertainty over Valley Federal’s problem-plagued All Valley Acceptance Corp. subsidiary.

All Valley Acceptance, which makes loans to buyers of mobile homes and other pre-manufactured homes and sells the loans to investors, has been a major problem for Valley Federal. Part of the trouble has arisen because All Valley has received an unexpectedly large number of loan prepayments, costing the company anticipated interest earnings.

In the third quarter ended Sept. 30, Valley Federal’s earnings plunged to $132,000 from $5.9 million a year earlier, largely because of problems with the subsidiary.

Valley Federal has previously spurned Citadel’s overtures, seeking friendly investors and holding merger talks with other S&L; firms. It has also complained to regulators that, because Citadel at one point had options to acquire as much as 39.2% of Valley Federal, it already had effective control of Valley Federal, thus limiting its option to choose whether to stay independent or seek another partner. In May, Citadel disclosed that it would not exercise those options because it had not received Federal Home Loan Bank Board approval to buy the shares.

Gerald S. Haims, who follows Valley Federal for Seidler Amdec Securities in Los Angeles, said Valley Federal may now be more receptive to a Citadel bid, in part because federal regulators struggling to resolve the nation’s savings and loan crisis may require institutions to substantially boost their capital, which he said might be difficult for Valley Federal to do.

Tuesday’s announcement said the two sides will negotiate all the terms of an agreement except for the price. Once that is done, Citadel would then submit a price within five days. The companies said the bid would be a combination of cash and a security, whose value could be adjusted depending on the future performance of All Valley Acceptance.

The price will not be determined until Citadel updates its analysis of Valley Federal’s books, Citadel lawyer Godfrey Evans said. Fleming, the Valley Federal attorney, said it could be several weeks before a Citadel bid is made.

Valley Federal’s book value--assets minus liabilities--is $16.32 a share. However, analyst Haims noted that further problems with All Valley Acceptance could lower that figure.

The Van Nuys S&L;’s stock closed Tuesday in national over-the counter trading at $14, up $2. Citadel’s shares closed at $39.625, down 12.5 cents, on the American Stock Exchange.