Not long ago we wrote an article stating our belief that the excitement over Citadel indicating they were interested in E-Trade (ETFC) selling the business was misplaced (story here). For those not familiar Citadel is the hedge fund which saved E-Trade from collapsing during the financial crisis, and now appears ready for the board to sell the company. Our thesis was that first it was not a seller’s market and that the usual suspects were already digesting recent acquisitions, while other suitors were either unwilling or unable to make a move due to their balance sheets still being in shambles.
With Europe once again at the forefront of every investor’s mind, followed closely by the banks and their situation here in the U.S., we still think that E-Trade could wait months, if not years, for buyers to come and "kick the tires." At this point it is a foregone conclusion that Bank of America (BAC) is too preoccupied with its own problems to pull off an acquisition, and Wells Fargo (WFC) is probably too involved in the long awaited rebranding of the Wachovia business to get side tracked with a business that would require a bit of TLC to fully integrate. We considered these two to be long shots, but with the current market climate for banks, both Bank of America and Wells Fargo are out of the picture. Regions Financial (RF), which we thought was the furthest possibility for E-Trade looks to be exiting the business as well via a divesture of their brokerage business, Morgan Keegan.
We feel safe at this point in making the all encompassing statement that no traditional bank, investment bank or traditional broker will be touching this asset before the mess in Europe is cleaned up, Washington finalizes the debt agreement and the overall business environment in the US improves.
The short list of potential acquirers is just that. We still feel that either Charles Schwab or TD Ameritrade (AMTD) will ultimately purchase E-Trade, but with the current state of the balance sheet and income statement it is quite difficult to envision a large multiple being paid out. Our belief is that ETFC would receive a buyout offer no more than 20-25% higher than today’s price, and far below the current 52-week high.
In the current environment it appears investors have come around to our belief that ETFC will be a tough sell with all of their baggage. If Charles Schwab and TD Ameritrade are the only bidders, a bidding war is hard to imagine as both companies are disciplined buyers. Unless a buyout materializes or there is improvement in the economy as a whole, we view ETFC shares as underperformers to their industry peers over the next 6-12 months, thus our belief that those wanting to participate in the sector would be better suited buying EFTC’s potential future acquirers.