E*Trade: Living on Borrowed Time?

The largest broker in the U.S. -- E*Trade Financial Corp. (NYSE:ETFC) -- is living on borrowed time. It received a reprieve of sorts when it refinanced its mountainous debt load on Monday with its largest shareholder Citadel Investment Group LLC, but many say that the move only buys E*Trade two to three years of breathing room. Furthermore, critics conclude the company may be better off seriously considering a breakup and sale of the brokerage division.

E*Trade's current handicap comes from the massive debt it inherited from its merger with online bank Telebanc Financial Corp. for $1.8 billion in 2000. The company levered up and took on deeper exposure to what are now toxic mortgages. In April, E*Trade announced a 13% rise in delinquent loans to $2.24 billion.

Selling all or part of the company has been considered before by E*Trade, but with its financial picture worsening -- it posted a loss in 2008 and is expected to do the same in 2009 and 2010 -- the need for action is becoming more acute. The sale of its brokerage unit could fetch between $3 billion and $5 billion for paying down debts, according to Reuters. But even those figures may be too optimistic considering that some buyers may take a "wait and see" approach on a sale in hopes of buying the brokerage assets out of bankruptcy or in a distressed price.

That appears to be the outlook of one analyst. As David Trone of Fox-Pitt Kelton told Reuters, "We continue to firmly believe that E*Trade will be either bankrupt or sold by the middle of 2010, with the latter now looking more likely." - Gerald Magpily

Comments

[danS:]

With the completion of the debt exchange Citadel will essentially own E-trade. E-trade will weather the storm in the next year or two with further debt exchanges if necessary. Once they put the mortgage fiasco behind them they will be a brokerage firm which will earn approximately 500 million annually (which is what they now earn before mortgage debt write offs)and command a market cap of about 7 to 10 billion dollars.

The risk to investors is how many shares of E-trade there will be once the storm clears. With the current debt exchange the number of share will rise to as much as 2.5 billion which yields a share price of 3 to 4 dollars with the above market cap.

Jun 23 11:56 AM

[User 412420:]

Mr. Magpily starts with an error in stating E*Trade is the nation's largest broker. He also ends with an error, in my opinion, in stating that prospective buyers would likely still take a "wait and see" on buying the brokerage business as he seems to ignore the stablizing influence of hedge fund giant, Citadel. Prudence dictates that Citadel not be ignored as their strategy is to allow the best available on-line platform brokerage, known as E*Trade, to continue to perform admirably well into the recovery as DARTs increase and assets and interest rates rise, thus significantly increasing cash flow...and any associated buy-out offer.

Jun 23 04:46 PM

[Al the pal:]

If anyone were seriously interested in buying out ETFC then why didn't they express an interest when it was down at 50 cents a share pre-dilution?

It is extremely unlikey that the leading candidates to buy out ETFC, that being Schwab and Ameritrade will make any overture for the entire company as both companies probably want nothing to do with ETFC's outstanding toxic loans. Those loans have not gone away since the SPO, it just raised a little bit of capital to cover their ongoing losses.

Just because they Citadel is converting a bunch of their debt from high yielding debt to zero coupon convertible debt the fact remains for shareholders that it is still debt and Citadel will get payment for it before any shareholders if there is a buyout.

Citadel has been a smart cookie in getting the price of their bonds up from 60 cents on the dollar back to above par but by doing so they have done it at the expense of the shareholder. I totally expect that trend to continue. Citadel gets their investment back and shareholders get left with a diluted shell of a company.

Typical penny stock scam but on a larger, more public scale.

Jun 24 02:26 AM

[Advill:]

Citadel has the money to bail out E.trade, at the end, if capital is the matter Citadel can provide it, at the same time Fed is not in the task of "helping" a Fund.
ETFC is a good company, is emerging from its problems and will report sustancial earnings in the next quarters, if selling it is the option the value can easily be 4X actual price.

Regards

Jun 24 03:38 PM

[kagame:]

Economic recovery would benefit Etrade's pps far more than any other stock I have heard of lately. As the market continues to rally on a supposed end to this recession, Etrade will move drastically higher.

What people like Al the Pal fail to realize is that all the bad news is baked into the stock price. I have read numerous sources say it is trading below liquidation value, Citadel or no Citadel.

Also consider the high % of the float short. If we see encouraging economic indicators that might bode well for the housing industry and the mortgage portfolio, Etrade will skyrocket.

This is all about risk reward. Etrade cannot go below $0.

Jul 21 04:17 PM