Friday, December 16, 2005

Analysts Say Buy of TD Waterhouse Still a Good Deal

AP, Josh Funk, 16 December 2005

Omaha, Neb. (AP) -- More than a third of the nearly $2 billion online brokerage Ameritrade Holding Corp. plans to borrow to pay for its latest acquisition will go directly to the company's board and top executives in dividends.

Yet despite the increase in borrowing needed to help pay the $6 per share special dividend -- offered to encourage shareholders to approve the deal -- analysts said this week that Ameritrade's acquisition of competitor TD Waterhouse Group Inc.'s U.S. retail securities business is still a good deal.

Ameritrade expects to lead the online brokerage industry in trades after the acquisition by handling an average of 239,000 trades a day and build on its roughly 25 percent share of the active investor market. By comparison, Charles Schwab Corp. reported 194,000 trades a day, on average, and E-Trade Financial Corp. said it handled 125,000 a day in the quarter that ended in September.

With E-Trade hungry to expand, analysts expect more consolidation in the online brokerage industry. That makes sense, they say, because acquirers have been able to successfully move customers onto merged trading platforms that allow them to profitably reduce costs.

Ameritrade executives predict the new company to be named TD Ameritrade will save about $378 million in annual expenses by consolidating operations and have the opportunity to generate $200 million a year in new revenue.

Ameritrade rejected takeover and merger offers from E-Trade in May and June and vowed to plow ahead with the $2.9 billion deal hammered out in June to acquire TD Waterhouse. The $6 dividend would be paid to Ameritrade stockholders of record on Nov. 16 if they approve the transaction next month.

The company's board of directors and top executives stand to receive $752.6 million in dividends for the more than 125 million shares they control, according to documents filed with the Securities and Exchange Commission. Almost $536 million of that will go to Joe Ricketts, Ameritrade's 63-year-old founder and chairman.

After repaying a $65 million loan he and his wife received from TD Waterhouse Group's parent company last month, Ricketts will end up with $470.9 million in cash, the filing shows.

Despite the seemingly large payouts to the company's leadership, analysts say the rationale for the takeover remains sound.

Ameritrade should benefit because the company will be able to add financial advising and diversify its business, according to analyst Seth Dadds of Garp Research Corp. in Baltimore. "If you want to go out and compete with the (Charles) Schwabs of the world, you have to have some kind of advising business," he said.

Matthew Snowling, an analyst with Friedman, Billings, Ramsey and Co. in Arlington, Va., said Ameritrade needed to make an acquisition because the online brokerage industry is rapidly consolidating. E-Trade, spurned by Ameritrade, instead purchased rival online traders HarrisDirect and BrownCo.

"One could argue they played E-Trade and TD against each other until they got the best deal for themselves," Snowling said.

Ameritrade spokeswoman Katrina Becker said the acquisition was not designed solely to benefit the Ricketts family or private investors TA Associates Inc. and Silver Lake Partners. Together, the three own about 34 percent of Ameritrade.

"Obviously, they are going to benefit from this acquisition, but so will all shareholders," Becker said. "The Ricketts family is committed to the long-term growth of the company."

Ameritrade is obtaining the financing from a consortium of Wall Street firms, including Citigroup, Merrill Lynch & Co. Inc., UBS and JPMorgan Chase & Co. One loan of $1.65 billion is to be paid back in seven years, while a second loan of $250 million is due in six years. Ameritrade will also open a $300 million line of credit for operating capital.

The first mention of a special dividend as part of the TD Waterhouse deal came in May, two weeks after E-Trade offered $1.5 billion in cash to Ameritrade shareholders, according to the proxy, which would have included a dividend of $1 per share. In June, E-Trade sweetened its offer to $2.3 billion in cash.

Yet Ameritrade's board decided unanimously on June 21 that purchasing TD Waterhouse made more sense, strategically. That's also when they decided to offer the $6 special dividend.

The share price of Ameritrade, E-Trade and Schwab have been on the rise since May when news of the talks between Ameritrade and E-Trade were first reported. But while E-Trade shares have zoomed 41.5 percent higher this year, Schwab has gained 26.5 percent and Ameritrade is up only 10 percent year to date.

Details of what the deal will mean for Ameritrade and TD Waterhouse customers haven't been fully released, but Becker said Ameritrade has tried to keep customers informed through its corporate Web site,

Generally, the owners of TD Waterhouse's 2.3 million accounts will have to adjust to using Ameritrade's trading platform, and the owners of Ameritrade's 3.7 million accounts can expect to be offered investment advice through a nationwide network of branch offices created out of TD Waterhouse's 143 offices.

Company officials plan to design investment products, like the research and advising products TD Waterhouse offers now, to attract long-term investors, particularly those who may not have enough money to attract a full-fledged broker. Some products will also be designed to serve registered investment advisers who may use TD Waterhouse's research or trading tools to help their own clients.

In the past Ameritrade depended on trading commissions for most of its revenue. The new company will also be able to charge asset-based fees for advice.

The combined company will have the third-largest account base in the brokerage industry with about 5.9 million accounts, according to figures from March before the deal was announced. TD Ameritrade expects to manage about $219 billion in client assets.

A special shareholder meeting will be held on Jan. 4 for the vote on this acquisition, and the deal is expected to close on Jan. 24.