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How much is that cash in the window.


E*Trade gets $2.55 billion Citadel cash infusion By Lilla Zuill
2 hours, 37 minutes ago



NEW YORK (Reuters) - E*Trade Financial Corp (ETFC.O) is getting a $2.55 billion cash infusion from investors led by Citadel Investment Group, which is also buying the mortgage-related securities portfolio that has been the primary source of the discount brokerage's recent woes.

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Chicago-based Citadel, which often invests in troubled assets and companies, will gain about 18 percent ownership of E*Trade and a board seat, E*Trade said on Thursday.

E*Trade shares, which have lost about 80 percent since January, surged at first on news of the deal but wound up falling 46 cents, or 8.7 percent, to close at $4.82 on Nasdaq, as investors soured on a deal that didn't meet expectations.

BlackRock Inc (BLK.N), the largest publicly traded U.S. asset manager, is also an investor in the Citadel bail-out, E*Trade said.

Mitch Caplan, E*Trade chief executive since 2003, is stepping down, the company said. Donald Layton, a former vice chairman of J.P. Morgan Chase & Co (JPM.N) who has been advising the brokerage, will become E*Trade's chairman. Jarrett Lilien, now chief operating officer, will become acting chief executive.

The deal includes immediate funding of about $2.4 billion and rids E*Trade of its troubled $3 billion asset-backed securities (ABS) portfolio. Citadel will pay $800 million for the portfolio.

Another component of the deal is the purchase of $1.75 billion worth of 10-year notes and stock that will pay an annual interest rate of about 12.5 percent, E*Trade said.

E*Trade said it will take a fourth-quarter pretax charge of $2.2 billion as a result of the portfolio sale. It will also increase its allowance for bad home equity loans to $400 million and will issue common stock equal to about 20 percent of its outstanding shares.

LUMP OF COAL

"Citadel is the clear winner in this transaction," Bank of America analyst Michael Hecht said in a research note titled "Xmas comes early for Citadel, shareholders get lump of coal."

Hecht said Citadel's deal gives it a $3 billion asset-backed securities book for 27 cents on the dollar and $1.75 billion of secured paper at 12.5 percent -- and 84 million shares of stock "for nothing."

Hecht said shareholders, in contrast, "suffer (more than) 40 percent earnings per share dilution and 100 percent tangible equity dilution."

After E*Trade took large losses in its mortgage segment, analysts said it would have to pursue strategic alternatives, such as the sale of some assets or a takeover by larger rivals like Charles Schwab Corp (SCHW.O) or TD Ameritrade Holding Corp (AMTD.O).

E*Trade said it considered a tie-up with a peer company but the Citadel deal appeared best. Analysts were not convinced.

"Shareholders missed an opportunity for a sale of the company that would have been $10 (or more) (per) share," said David Trone, an analyst with Fox-Pitt Kelton Cochran Caronia Waller. He added that E*Trade was "a no-growth story" and cut his price target for the company from $7.50 to $6.00 a share.

Option traders also reacted. "They are liquidating some of their long call positions as the takeover speculation fades. Every call premium is down hard," Lefkowitz said. "For example, both the December $7 and $6 call premiums are down more than 40 percent in value," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.

CEO SEARCH

The company, one of the largest U.S. online bank and brokerages, said it will search for a new CEO. Acting chief Lilien, who has been with E*Trade since 1999, will be considered along with external candidates.

Lilien said in an interview that he was the only candidate so far. Departing CEO Caplan will retain a seat on the board and have an advisory role, E*Trade said.

E*Trade, best known for its brokerage business, in recent years diversified into mortgages, mortgage securities and other lending areas. That paid off until earlier this year, when the company was hit by large losses in its mortgage business.

Lilien said the Citadel deal allows it to get its troubled portfolio off its books and provides much-needed cash. And he said the company plans to stick with its two-pronged business model, offering brokerage and banking services to customers.

The board had considered about 40 different transactions, he added, declining to be more specific. "Our belief is that our business is in great shape," he said. "Our strategy we feel was on target -- it was our balance sheet that had the issues."

E*Trade earlier this month withdrew its financial outlook for 2007. Lilien said the company did not plan to issue financial forecasts at least through the end of the year.

E*Trade disclosed that retail client assets have fallen 15 percent in the month, but Lilien said it hopes to win back much of that business. As of November 27, retail client assets were $192 billion compared with $226.7 billion on October 31.

The company has historically issued financial metrics on a monthly basis, but on a conference call with investors it said it will now only make quarterly disclosures.

(Additional reporting by Doris Frankel and Justin Grant; Editing by Gary Hill)