E*Trade (ETFC): Citadel Deal Cuts Shareholders in Half

How bad did E*Trade (ETFC) screw up? Real bad.

The $2.55 billion injection from hedge-fund Citadel will result in 50% dilution to existing shareholders, says Citi analyst Prashant Bhatia, the man who started the run on the bank by murmuring “bankruptcy” two weeks ago. What’s more, Bhatia notes, despite talking to everyone in the world, this was the best deal E*Trade could get.  The vindicated Bhatia gleefully maintains his SELL on the stock. The New York Times reports:

“Actions speak louder than words, and the fact that almost 40 potential deal parties held talks with E*Trade’s BOD and the best deal resulted in over 50% dilution to existing shareholders, does little to inspire confidence in our view,” [Bhatia] wrote in a report on Friday.

Mr. Bhatia took issue with almost every aspect of E*Trade’s business:

  • Despite the company’s doubling its allowance for bad loans to $400 million, he wrote that the amount is not enough.
  • Despite the removal of chief executive Mitchell H. Caplan, E*Trade’s promotion of its president, R. Jarrett Lilien, to acting C.E.O. did not inspire confidence, he argued.
  • Despite the company’s arguing that its core brokerage business remained strong — customers placed more trades with the company this month than last — the unit remains smaller and slower-growing than its rivals, he wrote.

And the company remains an unattractive takeover target, according to Mr. Bhatia. That seems to be borne out by the Citadel deal: other strategic buyers sought only to buy the brokerage business, rather than the whole company and its mortgage portfolio.

Nor was the antagonized Bhatia the only analyst to pee all over the deal. Elsewhere on the Street, analysts had at their earnings estimates with machetes.

The E*Trade Chronicles:
E*Trade Saved By Hedge fund Citadel
E*Trade on the Block

E*Trade’s Desperate Ads Crush Stock Again

E*Trade CEO Denies Bankruptcy, Risks Jail TimeE*Trade to Customers: Please Don’t Take Money and Run!
How E*Trade Can Save Itself
Demolished E*Trade Plays the Wimpy “Irresponsible” Card

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