It has only been about three and a half months since I wrote about E*Trade Financial and the strong possibility that at some point the company is sold at a large premium to the then stock price of around $15 per share. Although it makes sense for the company to let its legacy loan book runoff as much as possible before exploring a sale, Citadel, with its 10% stake, urged E*Trade to sell themselves last week. The company has hired Morgan Stanley to looks at its options (though it did the same thing last year and decided to wait), and maybe not coincidentally, TD Ameritrade (long thought to be the most natural acquirer of E*Trade) has a previously scheduled board meeting this week during which buying E*Trade will surely be discussed.
My original post pegged E*Trade’s value at between $22 and $27 per share and I stand by that range. E*Trade’s loan book continues to runoff as expected and loan losses and delinquencies continue to trend lower every quarter (second quarter earnings were reported last week and delinquent loans fell to $1.4 billion from over $2 billion a year ago). After digging into the details of that mortgage exposure, a buyer such as Ameritrade should realize that there is very little there that should scare them out of making an offer. I don’t know if a fair offer will come this year (buyers will obviously try to lowball an offer and point to the loan book as the reason why) but even if management stands by their plan from last year of waiting out a couple more years, investors will only get more for their shares. Any offer not at least in the mid 20’s probably isn’t in the best interests of shareholders at this time. Nonetheless, this story could get very interesting in the next few months so stay tuned.
Full Disclosure: Long shares of E*Trade at the time of writing, but positions may change at any time