Citadel LLC – the chief investor in E*TRADE Financial Corporation (ETFC) – 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.
Citadel will sell 27.4 million shares, which represents its entire stake in E*Trade, to Citigroup Inc (C) 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 regulatory scandals.
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. (EVR) and Piper Jaffray Companies (PJC). Both these stocks carry a Zacks Rank #1 (Strong Buy).
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