The largest broker in the U.S. -- E*Trade Financial Corp. (NYSE:ETFC) -- is living on borrowed time. It received a reprieve of sorts when it refinanced its mountainous debt load on Monday with its largest shareholder Citadel Investment Group LLC, but many say that the move only buys E*Trade two to three years of breathing room. Furthermore, critics conclude the company may be better off seriously considering a breakup and sale of the brokerage division.
E*Trade's current handicap comes from the massive debt it inherited from its merger with online bank Telebanc Financial Corp. for $1.8 billion in 2000. The company levered up and took on deeper exposure to what are now toxic mortgages. In April, E*Trade announced a 13% rise in delinquent loans to $2.24 billion.
Selling all or part of the company has been considered before by E*Trade, but with its financial picture worsening -- it posted a loss in 2008 and is expected to do the same in 2009 and 2010 -- the need for action is becoming more acute. The sale of its brokerage unit could fetch between $3 billion and $5 billion for paying down debts, according to Reuters. But even those figures may be too optimistic considering that some buyers may take a "wait and see" approach on a sale in hopes of buying the brokerage assets out of bankruptcy or in a distressed price.
That appears to be the outlook of one analyst. As David Trone of Fox-Pitt Kelton told Reuters, "We continue to firmly believe that E*Trade will be either bankrupt or sold by the middle of 2010, with the latter now looking more likely." - Gerald Magpily
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Zweig has upgraded E*Trade (NASDAQ: ETFC) to Outperform from Underperform citing an attractive risk/reward following the company's capital raise and debt exchange commencement. Our firm believes the worst is behind the company and has a $2 target on the stock. We feel that a possible or should we say expected takeover by TD Ameritrade is on the horizon putting this stock close to $4.00 a share. Hold on to e trade..................