Citadel LLC, the largest investor in E*Trade Financial Corp, is selling its entire stake in the discount brokerage and bank company, ending a contentious and profitable five-year relationship.
E*Trade said on Wednesday that Citadel, a Chicago-based hedge fund that bailed it out in November 2007, is selling 27.4 million shares, its entire 9.6 percent stake, on or about March 19 to Citigroup Inc. in an underwritten offering.
Citadel, whose founder Ken Griffin has tried for years to convince his fellow E*Trade board members to sell the company, confirmed the sale.
New York-based E*Trade said it will not share in the proceeds and that the deal will not affect the total number of common shares outstanding.
"This wasn't expected, but it's certainly not a complete surprise," said Jason Weyeneth, an analyst at Sterne Agee who has a "buy" on E*Trade shares. "The relationship with Ken has been slightly contentious in recent years and he's been selling down over the years."
Citadel realized well over $800 million on its E*Trade investment, according to people familiar with Griffin's strategy.
In addition to investing $2.6 billion in cash in 2007 when E*Trade shares were trading below $1 a share and the company was flirting with bankruptcy, Citadel received senior notes paying 12.5 percent and bought E*Trade Bank's subprime mortgage-backed securities portfolio with a face value of about $3 billion at about 27 cents on the dollar.
It also negotiated an agreement that required E*Trade to send 40 percent of its customer trades to Citadel's brokerage unit for execution. The arrangement ended in 2010 and Griffin riled E*Trade last year by charging that it might not be getting the best execution price for clients.
In a regulatory filing last month, E*Trade said an internal review of its order-handling practices found "shortcomings" in its measurement of best execution. It also said regulators might investigate its procedures.
Citadel's investment in E*Trade ebbed and flowed over the years, reaching a peak of 40 percent of its common stock on a fully diluted basis in 2009.
E*Trade, which has had seven chief executives since 2007, is returning to its roots as a discount brokerage and winding down its bank loan operations. It reported earlier on Wednesday that it has reduced its loans by 3 percent this year to $10.3 billion and by 68 percent from its peak in 2007.
"The loan portfolio is running off and the brokerage accounts are accelerating," Weyeneth said. "The fundamentals are sound and the balance sheet improvement continues on a steady base."
Like other discount brokerage firms, E*Trade continues to struggle with low client trading volumes and rock-bottom interest rates that trim its ability to get a return on clients' spare cash. Average daily trades by customers fell 10 percent in February from a year earlier and 1 percent from January.
Spokespeople at E*Trade and Citadel said they did not know if Griffin would remain on the board. E*Trade, which elects all of its directors in May at its annual meeting, said last week that its chairman and two of its directors are stepping down at the board meeting. Griffin was not among the directors named.
E*Trade shares, which have risen about 30 percent this year, fell 4.8 percent in after-hours trading to $11.25 following the announcement of the Citadel sale.
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