IPO News
Mon, 21 Jun 1999, 6:48pm EDT
Waterhouse IPO a Winner for Canadian Bank: Financing Business
By Randy Whitestone
New York, June 21 (Bloomberg) -- Toronto-Dominion Bank,
taking advantage of demand for online brokerage shares, expects
to raise over $700 million by selling part of its Waterhouse
Securities Inc. unit, giving it a market value of $8 billion, or
more than Bear Stearns Cos.
The sale would be a coup for Toronto-Dominion, whose $525
million purchase of Waterhouse three years ago was derided by
analysts as too expensive. Waterhouse, whose customer trading
over the Internet rose seven-fold the past 18 months, is the No.
3 online broker and also runs a network of over 200 branches.
Selling a 9 percent stake in Waterhouse puts Canada's fifth
largest bank in a crowded queue. Donaldson Lufkin & Jenrette
Securities Corp. raised $320 million when it sold 16 percent of
DLJ Direct last month; Datek Online Holdings Corp. raised $300
million in a private sale;, and Ameritrade Holding Corp. is
planning a $500 million stock sale.
''Most of them are raising money because their parents will
never have cheaper access to capital than they do today,'' said
Sheldon Grodsky, president and director of research at Sheldon
Grodsky Associates Inc., a South Orange, New Jersey, brokerage.
''We have a situation where the stock market is enamored with the
group far beyond their economic value.''
Shares of online brokers E*Trade Group Inc. and Ameritrade
rose more than sixfold the past year as online trading doubled
industrywide. Stock trades over the Internet averaged 496,000
daily in the first quarter, about a seventh of the total,
according to U.S. Bancorp Piper Jaffray.
New York-based Waterhouse, formally known as TD Waterhouse
Group Inc., will sell 32 million shares, an 8.8 percent stake, at
$20 to $24 apiece, according to a Securities and Exchange
Commission filing. That leaves Toronto-Dominion with a 91 percent
stake worth about $7.3 billion in the securities broker. That's
about half Toronto-Dominion's market value and helped raise the
bank's shares 33 percent this year.
''TD got a good deal,'' said Steven Franco, analyst with
Piper Jaffray. ''Waterhouse has had really good account and asset
and trading growth without having to spend millions of dollars in
advertising.''
Rapid Growth
TD Waterhouse's active accounts have almost doubled in the
18 months ended April 30, to 1.88 million from 960,000. In the
same span, assets rose 153 percent to $106.1 billion, while
online trades rose to a daily average of 74,265 a day. That
growth is similar to E*Trade and Ameritrade, though Waterhouse is
more profitable than either of those two rivals.
E*Trade, for example, spent $59.9 million on marketing to
add 233,000 accounts in the quarter ended March 31, for an
average cost of about $250. TD Waterhouse spent only $12.5
million in the quarter ended April 30 to add 253,000 accounts,
for an average of than $50 each, according to its filing.
As a result, Waterhouse profits are second among online
brokers to Charles Schwab Corp., the biggest in the industry. TD
Waterhouse earned $77.4 million in the 12 months ended April 30,
one-fifth of what Schwab earned in the 12 months ended March 31,
and more than triple Ameritrade's profit in the same period.
E*Trade lost $17.8 million in that span.
If Waterhouse sells at $22 a share, the company and its
underwriters, led by Credit Suisse First Boston, would be valuing
the brokerage at about $4,300 per active account, roughly 30
percent less than the $6,000 multiple at Schwab.
Waterhouse vs Schwab
About two in five Schwab accounts trades online, so it's
valued at about $14,000 per online account. The ratio is one in
three for TD Waterhouse, giving it a proposed a value of about
$13,000 per online account.
With a market value of $8.03 billion, Waterhouse would sell
for 10 times revenue, 100 times the past 12 months' profits, and
7.6 cents per dollar of customer assets, in each case slightly
below the average of five publicly traded online brokerages.
''Those valuations are in line,'' with other discount
brokers said Appleby.
About $221 million of the proceeds will be used to repay
investments by Toronto-Dominion, which folded its Green Line
Investors Services, Canada's biggest discount broker, into the
Waterhouse. The remainder of the sale will be used for
technology improvements, increased advertising and other general
purposes.
The company's timing could have been better, because shares
of rivals like Schwab are down at least 40 percent since peaking
in mid-April on fears of higher interest rates and a slowdown in
U.S. stock trading volume. Earlier this year, the bank expected
to raise as much as $1 billion from the Waterhouse sale.
''Trading has contracted,'' said Appleby. ''We suspect that
the issue's going to come out fairly well, but not as high as it
might have been.''
Lots of Advertising
With Waterhouse and its rivals raising cash, analysts expect
more spending on advertising and a freeze on commissions, which
average about $15.75 industrywide. Waterhouse charges $12 a
trade.
''Once these guys raise money, they will just keep their
prices down,'' he said. ''This cascade of money into online
brokers means we can look forward to a future of negative
profits.''
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