Tuesday, July 25, 2006

TD Ameritrade Chairman Boosts Stake to 19.76%

Barron's, Naureen S. Malik, 25 July 2006

TD Ameritrade founder and chairman, J. Joe Ricketts, has been taking advantage of depressed prices to build up his stake in the online brokerage firm.

Ricketts purchased nearly 7.3 million shares for $113.84 million late last week, based on Securities and Exchange Commission filings late Monday. The transactions took place last Thursday and Friday when the shares were priced from $15.16 to $15.87.

This is the second-largest transaction by an executive or director at any company in the last two years after Michael Dell's purchase in May, notes Ben Silverman, director of research at InsiderScore.com.

Ricketts increased his overall holdings to about 125.6 million shares, or a 19.76% stake. There were nearly 610 million outstanding shares of Ameritrade as of April 30.

"Obviously we can't speculate what Mr. Ricketts' intentions are," says TD Ameritrade spokeswoman Katrina Becker.

Seven months ago, TD Ameritrade closed its $2.9 billion acquisition of Toronto-Dominion Bank's TD Waterhouse unit to form TD Ameritrade, the largest online broker in terms of volume. The deal stipulated that Ricketts and his family must hold a 20.83% stake in Ameritrade by Jan. 24, 2007, but no more than 29% 10 years following the deal, in order to maintain three seats on the board of directors.

Ricketts' son Thomas has been a director since 2002 while his other son Peter stepped down from the board in May to run for the U.S. Senate after winning the Republican primary in Nebraska.

Last week's transactions were the first open-market purchases by Ricketts since September 2002, when the stock was trading at $4. InsiderScore.com data indicate that he has never sold shares in the open market, though he sold 2.7 million shares in a private offering in 2003 for $33.5 million.

"I think it's a real vote of confidence in terms of the TD Waterhouse integration," says InsiderScore.com's Silverman. "Ricketts saw an opportunity to increase his holdings at a time when the stock had sold off rather significantly."

TD Ameritrade shares have faltered this year amid heightened pricing competition from online brokers such as Charles Schwab and E*Trade. General market choppiness hasn't helped.

TD Ameritrade shares rallied 23% in the past week, closing at $16.76 Tuesday, since the company posted upside fiscal third-quarter earnings on July 18, along with record operating margins and revenues, thanks to an increase in asset-based revenues and cost control.

Still, TD Ameritrade shares, which hit a 52-week intraday low of $13.30 on July 14, are down 34% year-to-date, compared to a 7% gain in the Dow Jones U.S. Investment Services Index. So far in 2006, Charles Schwab is up 1.3% and E*Trade is up 10%.

In addition to Ricketts' purchase, Thomson Financial senior quantitative analyst Mark LoPresti says consensus purchasing has been improving.

In May, two Ameritrade directors -- William Edmund Clark and Fredric Tomczyk -- each purchased 6,000 shares for $102,600.

This offsets the spate of selling by Peter Ricketts several months ago, likely to help pay for his Senate campaign, says InsiderScore.com's Silverman. Peter Ricketts sold about 473,000 shares for $8.8 million in December and February, according to Thomson Financial data.

Peter Ricketts had served in various executive roles at TD Ameritrade from 1993 to 2005, including chief operating officer.

"[T]he fact that Joe Ricketts is buying should give investors increased comfort," wrote Sandler O'Neill & Partners analyst Richard Repetto in a research note issued Tuesday. "[T]here had been uncertainty whether the Ricketts family were buyers or sellers after Pete Ricketts, Joe's son, resigned from his position and board seat at TD Ameritrade."

Toronto-Dominion was given a 32% stake in the TD Ameritrade transaction and was granted permission to acquire up to 39.9% of the outstanding shares by 2010. The Canadian bank can then increase its holdings to 45% by 2016 with the option of submitting a nonpublic proposal to the board to gain control of the remaining shares, according to TD Ameritrade's January proxy filing.

Since the deal closed in January, Toronto-Dominion has purchased more than 14 million TD Ameritrade shares for about $241.8 million, increasing its stake to nearly 240.8 million shares, or 39.5% of the company. The transactions took place under a 10b5-1 trading plan.
InsiderScore, 25 July 2006

The chairman of TD Ameritrade has made the largest purchase by any insider, at any company, in the past two years. Founder and Chairman J. Joe Ricketts bought approximately 7.3M shares at an average price of $15.59 on July 20th/21st, paying out more than $113.8M for the stock, and upping his holdings in the company to more than 120.55M shares, or about a 19.76% stake. Ricketts' last open market transaction came in November 2003, when he sold 2.7M shares at $12.38.

In June 2005, after spurning a takeover offer from E-Trade, AMTD announced a deal to acquire TD Waterhouse, the U.S. brokerage business of Toronto-Dominion Bank. Under the terms of agreement, TD received a 32% stake in AMTD, and the Canadian company agreed to immediately launch a tender offer to acquire an additional 7.9% stake in AMTD. TD also agreed to limit its ownership stake in AMTD to 39.9% for three years from the closing (January 24th, 2006), and 45% from years four through ten. Ricketts, meanwhile, agreed to limit his family's ownership to 29% for ten years from the closing. TD eventually completed most of the tender offer, via purchases sometimes well above the $16 price, through a trading plan, and the company currently holds a 39.5% stake in AMTD.

Ricketts founded what is now AMTD in 1971 as a local investment bank in Omaha, Nebraska. By 1975, he had launched a discount brokerage firm, and through a series of acquisitions, he eventually created an online brokerage giant, which he took public in 1997 at a split-adjusted price of $1.25 per share. Ricketts continued his acquisitive streak in the early part of this decade, taking over National Discount Brokers and Datek, among others. One son, Thomas, is currently a board member, while his other son, Peter, resigned from the board two months ago to pursue his candidacy for the U.S. Senate (he's a Republican running in Nebraska). The Ricketts family is #293 on the Forbes list of The World's Richest People, and #93 on the list of America's Richest People.

On July 14th, shares of AMTD fell to $13.30, a new 52-week low on an absolute basis, though not taking into consideration a $6.00 per share one-time dividend paid out to shareholders with the closing of the TD Waterhouse deal. Since the dividend was paid on January 25th, and based on today's price at 11:15 AM ET, the stock is down about -15%.

AMTD was able to move off its low thanks to a solid fiscal third-quarter (ended June 30th) earnings report, which also saw the company raise its fiscal 2007 guidance.

For Q3, AMTD reported earnings of $139.8M, or 23 cents per share, up from $83.6M, or 20 cents per share (the disparity in EPS is the result of dilution from the TD Waterhouse deal). Revenue rose sharply as a result of the acquisition, from $234.4M to $540.3M, though operating expenses more than tripled as well, from $97.5M to $307.3M. AMTD's top line was a few million shy of what analysts expected, but the company beat EPS forecasts by a penny. Looking forward, AMTD said it expects FY07 EPS of 99 cents to $1.21, compared to a consensus forecast of $1.20, and Q406 EPS of 87 cents to 93 cents, excluding a one-time gain, and compared to a consensus forecast of 92 cents.

"Despite a decline in investor activity in June, we realized a record quarter, thanks in part to an increase in asset-based revenues," said Joe Moglia, chief executive officer. "We continue to focus on completing the TD Waterhouse integration and positioning AMTD for growth in the long-term investor segment. Over the next year, we expect the investments we are making in our technology, value propositions, and brand to deliver results that will enhance our growth and strengthen our market position going into 2008."

Following AMTD's earnings report, Howard Chen, an analyst with CSFB, said that he believes AMTD will have "significant earnings power" once the Waterhouse integration is completed, although the short-term outlook for the stock "remains choppy."

Worth Noting: Ricketts' purchase trumps the $70M open market buy transacted by Dell Founder and Chairman Michael Dell in May, and is now the largest open market purchase by an insider, excluding institutional owners, in the past two years. Additionally, over the past year, only Aubrey McClendon, the CEO of Chesapeake Energy, has laid out more cash ($159M) for shares of his own company.