Citadel LLC - the chief investor in
E*TRADE Financial Corporation
) - announced that it is offloading stake in the latter, thereby
concluding a 5-yeal old controversial as well as beneficial
relationship. Citadel's investment in E*TRADE witnessed peaks and
troughs over the years, reaching a high of 40% of its common
stock on a fully-diluted basis in 2009.
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Citadel will sell 27.4 million shares, which represents its
entire stake in E*Trade, to
) in an underwritten offering. The deal is anticipated to close
on or near Mar 19, 2013. However, the agreement will not affect
E*TRADE's total number of common shares outstanding.
In Nov 2007, Citadel - a Chicago-based hedge fund - bailed out
E*TRADE by acquiring its 9.6% stake, investing $2.6 billion in
cash. Further, the former received senior notes having an
interest rate of 12.5% and bought E*TRADE Bank's subprime
mortgage-backed securities portfolio having a face value of
roughly $3 billion. Citadel has realized more than $800 million
on its investment in E*Trade.
E*Trade also was involved in a deal with Citadel's brokerage
unit, which executed 40% of E*Trade's customer trades. The deal
was terminated in 2010. Further, E*Trade was embroiled in
Amid the challenging economy, we expect E*Trade's initiatives to
strengthen its client-advisor relationship. However, we remain
concerned about the sluggish macroeconomic environment, which
might lead to lower trading activities. Moreover, fluctuating
interest rates are expected to continuously impact the company's
financials in the near term.
However, E*TRADE's initiatives to reduce balance sheet risk by
focusing more on brokerage and bring down its bank loan business
appear to be promising, although these will put near-term
pressure on the net interest margin. Moreover, its expense
discipline and better capital position are impressive and will
likely aid E*TRADE to navigate through the current cycle.
Currently, E*TRADE carries a Zacks Rank #3 (Hold). Other
brokerage firms that are performing better include
Evercore Partners Inc.
Piper Jaffray Companies
). Both these stocks carry a Zacks Rank #1 (Strong Buy).