National Post (National Edition)
TD Bank to book $2.3B gain on closing of TD Ameritrade deal.
All-stock bid for Ameritrade successfully lands
The Charles Schwab Corp.'s US$22-billion acquisition of TD Ameritrade Holding Corp. is expected to leave Toronto-Dominion Bank sitting atop a more valuable investment — and one that analysts say gives the Canadian lender plenty of flexibility for its future plans.
TD Bank, Canada's second-largest lender, owned approximately 43 per cent of Omaha, Neb.-based broker TD Ameritrade. TD now owns about 13.5 per cent of San Francisco-headquartered Schwab, after Schwab's allstock bid for TD Ameritrade successfully closed on Tuesday.
Based on the US$36.94 Monday closing price of Schwab shares and “the impact of certain adjustments,” TD said it expects to record a revaluation gain of around $2.3 billion, although the effect on its capital levels is anticipated to be neutral.
A spokesperson for the bank said that TD's stake in Schwab would be approximately $12.4 billion based on Monday's closing price. Shares of Schwab fell just a bit over 0.5 per cent on Tuesday, to US$36.75.
“TD now has an important ownership stake in a wealth industry leader with the size, scale and capabilities to compete, drive growth and generate value for TD today and in the future,” CEO Bharat Masrani said in a press release.
The Schwab-TD Ameritrade transaction — announced last November amid the no-commission trading phenomenon, which blew a hole in broker revenues — was originally valued at around US$26 billion. It now sits at approximately US$22-billion following the slump that hit stocks in the earlier days of the COVID-19 outbreak.
TD originally said the deal had the potential to increase the value of its investment by $4 billion to $6 billion. However, Schwab and TD also struck a stockholders' agreement, which gives the Canadian lender two seats on Schwab's board of directors (to be filled by Masrani and TD's own board chair, Brian Levitt), but requires the bank to keep its shares for at least eight months after the deal closes.
The clock on those selling restrictions has now begun to tick. Moreover, some bank-watchers saw TD's stake as a possible source of funds for internal investment or for an acquisition of its own if they were sold, with the lender's leadership having voiced an interest in increasing its presence in the Southeastern United States.
Barclays analyst John Aiken said TD's Schwab stake gives them “optionality,” so that if a possible deal were to arise, those shares could be used to fund it. That said, the benefits from the Schwab takeover and the COVID-19-induced economic uncertainty that continues to linger could be persuasive arguments for another option — sitting still.
“In the immediate term, I think that they are going to be quite happy to see how the integration plays out and continue to collect the earnings contributions they receive from the stake on an ongoing basis,” Aiken said in an interview.
TD Ameritrade had been a significant source of earnings for TD Bank, adding $317 million to the lender's bottom line for the three months ended July 31. TD also had a deal with TD Ameritrade under which it held cash from the latter's customer accounts, earning interest for clients in return for a 0.25 per cent service fee, which is being lowered to 0.15 per cent for Schwab.
Those insured deposit account balances at TD had been surging — to around US$142 billion in July from US$103 billion a year earlier, according to a note Canaccord Genuity analyst Scott Chan wrote to clients — as the pandemic has prompted people to save money. Beginning next July, Schwab can start moving up to US$10 billion of those deposits a year to its own balance sheet, with a US$50-billion floor on that migration.
Chan also noted that the terms of the revised IDA deal have been extended until 2031, and that the scale added by the TD Ameritrade acquisition could allow Schwab to drive down operating costs and cross-sell customers from both companies. Schwab, which is moving its corporate headquarters from San Francisco to Texas, says adding TD Ameritrade will give it combined client assets of about US$6 trillion and 28 million brokerage accounts. The integration period for the deal is to last 18 to 36 months.
Credit-rating agency DBRS Morningstar said the completion of the Schwab-Ameritrade deal did not affect its double-A long-term issuer rating for TD, and that there is “potential upside” for the bank as synergies are squeezed out of the merger.
“I do think their intent is to be a long-term shareholder of Schwab,” said John Mackerey, senior vice president, North American financial institutions, at DBRS, in an interview. “But I think ... this does give them flexibility to monetize (TD's stake in Schwab) at some point if they desire to do so.”