Friday, November 23, 2007

E*Trade Shares Rally on Report of Takeover Talks

Nov. 23 -- E*Trade Financial Corp., the second worst-performing stock in the Standard & Poor's 500 Index this year, rose 25 percent on a report the online brokerage is in talks to sell itself or part of its business.

E*Trade is speaking to competing firms about a sale of the company or its brokerage operations, the CNBC cable news channel reported today, citing people familiar with the discussions whom it didn't identify. Charles Schwab Corp. and TD Ameritrade Holding Corp. may be among the bidders for E*Trade, the third- largest U.S. discount brokerage ranked by customer assets.

Earlier this year, E*Trade interrupted merger talks with competitors as writedowns at its banking unit led to the first quarterly net loss since 2002. E*Trade shares lost half their value Nov. 12 after Citigroup Inc. analyst Prashant Bhatia said the company's forecast for more writedowns to reflect the drop in value for asset-backed securities may spur customer defections and could lead to bankruptcy.

``E*Trade's bet on the mortgage business, which seemed so smart just a few years ago, has destroyed the firm's profitability,'' said Octavio Marenzi, chief executive officer of Celent, a Boston-based financial consulting firm. ``E*Trade is ripe for a sale.''

Pam Erickson, an E*Trade spokeswoman, Kim Hillyer, a spokeswoman TD Ameritrade, and Greg Gable, a spokesman for Schwab, declined to comment.

Mortgage Strategy

E*Trade shares climbed $1.07, or 25 percent, to $5.33 at 1:05 p.m. on the Nasdaq Stock Market after trading as high as $5.49. Options traders increased bets the stock will extend its gains in the months ahead.

Chief Executive Officer Mitchell Caplan's efforts to build E*Trade's online bank by tripling loans outstanding backfired as more borrowers fell behind on payments and U.S. home prices dropped. In addition to surprising analysts in October by posting a third-quarter loss, the company said it will miss its prior earnings forecast for the year because of a decline in the value of asset-backed securities.

E*Trade's market value has declined to about $2.2 billion, after a 76 percent drop in the stock this year amid mounting losses on securities tied to mortgages. Countrywide Financial Corp., the biggest U.S. mortgage lender, has declined 77 percent this year, making it the worst performer in the S&P 500.

Hedge Fund Pressure

The decline in E*Trade shares, along with pressure for a sale from hedge funds including Jana Partners LLC and SAC Capital Advisors LLC, may jumpstart takeover negotiations. E*Trade may seek to sell some loans, obtain new capital or sell itself to shore up its banking unit, Sandler O'Neill & Partners analyst Richard Repetto wrote in a note to clients Nov. 12.

``There's a very strong likelihood of a transaction in the very near term,'' Repetto, who has a ``hold'' rating on the stock, said today in an interview today. ``The credit situation is continuing to deteriorate and E*Trade could create some shareholder value by engaging in a transaction.''

Ameritrade has an advantage as a potential buyer because it's 40 percent owned by Toronto-Dominion Bank, Canada's third- largest bank, Repetto said. ``The bank has deep pockets and it has the ability to deal with some of the issues at E*Trade,'' he said.

Schwab, the San Francisco-based discount brokerage that ranks No. 1 ahead of Fidelity Investments, may be interested in a deal that adds more customers, Chief Executive Officer Charles Schwab told analysts last week. In June, Schwab said he had no interest in acquiring smaller rivals such as E*Trade or Ameritrade.

`Bank-Like Stuff'

``I would be very willing and able to analyze and pay for accounts if we could find a way to buy accounts,'' Schwab said at an investor conference Nov. 15. ``We're not interested in buying any banks or any bank-like stuff, but we would be for brokerage accounts. So that's where we stand now.''

Schwab rose 75 cents, or 3.3 percent, to $23.56 in Nasdaq composite trading, while Ameritrade added 82 cents, or 4.5 percent, to $18.90. For the year, the stocks have gained 22 percent and 17 percent, respectively.

Options traders added to their bets that E*Trade shares will extend their advance. Call-option volume rose to 84,533 contracts, more than double the average in the past month. Those bullish bets outnumbered bearish ones by almost 2-to-1.

Contracts that give the right to buy the stock at $6 before next month's options expire on Dec. 21 rose 50 percent to 75 cents. For those wagers to pay off, the shares must climb at least 13 percent from today's closing price before expiration.

``With companies that are the target of buyout chatter, you usually see call buying at very ambitious strike levels and we're not seeing that with E*Trade,'' said Rebecca Engmann Darst, an options analyst at Greenwich, Connecticut-based Interactive Brokers Group. ``Options traders are positioned rather conservatively despite the buyout chatter. That is a hint that the share price has a long row to hoe.''

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