E*Trade, Telebanc Nuptials Delayed by Thrifty Interloper
By Caroline Humer
Staff Reporter
9/3/99 7:00 AM ET
Christos Cotsakos, E*Trade's (EGRP:Nasdaq) chairman and chief executive, boasted when he unveiled his plans on June 1 to buy Telebanc (TBFC:Nasdaq), saying the deal sprung from a sushi dinner and was cut in 10 days -- Internet-time.
Yet three months later, E*Trade and Telebanc -- which owns online bank Telebank -- are still a ways from completing the merger. The roadblock: the Office of Thrift Supervision, which runs on bureaucratic time.
The OTS regulates the nation's savings and loans, one of which Telebank -- despite its bank-like name. Meanwhile, Softbank America, a unit of Japan's Softbank, owns 27% of E*Trade. To the OTS, that means Softbank is a controlling entity, which in turn means that Softbank would need to be regulated like a thrift holding company after E*Trade buys Telebanc.
Softbank doesn't want that intrusion. E*Trade and Softbank argue that after the transaction, Softbank will own 23% of E*Trade, putting it below the OTS' 25% controlling interest mark. And they say that despite the fact that Softbank is E*Trade's largest shareholder, it doesn't control E*Trade.
Either way, one thing is clear: The deal is delayed. It was supposed to have closed by Sept. 30. But E*Trade hasn't even filed its S-4 with the Securities and Exchange Commission for a share offering related to the deal, despite having said in its June 24 application with the OTS that it would file the document "shortly." Telebanc hasn't filed a proxy statement for a shareholder meeting on the issue.
E*Trade spokesman Patrick DiChiro says the company is moving forward with the merger and denies that there are any problems. "We are absolutely moving full force on closing this deal as expeditiously as we can," he says. Softbank declined to comment, and Telebanc didn't return phone calls requesting a comment.
Investors are showing little confidence in the deal. The terms call for Telebanc shareholders to get 1.05 E*Trade shares for each share they hold. Since the deal was announced on June 1, investors haven't been sticking to that ratio. For example, on June 2, the day the merger appeared in national newspapers, Telebanc's shares were 10% lower than the conversion rate dictated. On Sept. 1, the spread between E*Trade's share price and Telebanc's was $2.52, an 11% difference.
Some analysts say this shows the regulatory process is turning out to be more difficult and time-consuming than the market expected. Thrift analyst Charlotte Chamberlain, of Jefferies, says the merger-approval process typically takes three to six months. Foreign ownership issues lengthen the process, she says, because of concerns about accountability. (Jefferies has no underwriting relationship to any of the companies mentioned.)
"If they can't dissuade the Office of Thrift Supervision, then we're looking at 18 to 24 months," Chamberlain says.
In a glimpse of the regulatory issues that E*Trade faces, Softbank America on Aug. 5 filed a "rebuttal of control," stressing that its stake will fall below the 25% level and that E*Trade operates independently.
But while the OTS considers an individual with more than a 25% stake in a company to be a controlling party, it also can count someone with 10% to 25% as a controlling entity based on other factors, such as whether it's the largest shareholder.
E*Trade says the rebuttal filing is standard, but Chamberlain says she has never seen a rebuttal of control on any merger applications of the public thrifts she follows. OTS spokesman Bill Fulwider says rebuttal of control filings are "not real common." And an analyst who asked to remain anonymous says that the control "is clearly an issue."
In the rebuttal, Softbank says:
As an indication of its ongoing commitment not to exercise control of E*Trade, Softbank America has executed the attached OTS standard rebuttal of control agreement. Even without this rebuttal agreement, however, Softbank believes the facts indicate that it is not actually in control of E*Trade and the presumption should be rebutted. Under the OTS acquisition of control regulations, Softbank is only subject to a single control factor (it is the largest stockholder of E*Trade).
Softbank goes on to argue that it doesn't control E*Trade for a host of reasons:
Softbank has only one representative on the E*Trade board and will have no representatives on the Telebanc or Telebank boards. There are no officer interlocks between Softbank and E*Trade and there will be no officer interlocks between Softbank, Telebanc or Telebank.
Further there are no operating agreements between Softbank and E*Trade other than the joint venture agreement governing operations in Japan, which does not give Softbank a material economic stake in E*Trade's overall operations (the Japan venture represents less than 1% of E*Trade's and Softbank's revenues).
Softbank and E*Trade are launching an online brokerage in Japan.
Fulwider, at the OTS, says the rebuttal would be added to the E*Trade-Telebanc application and considered in tandem "in due course."
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