Some news over the last day or so means we need to make some adjustments.
The applicable section:
The percentages reported in this Amendment No. 15 are based upon 1,762,352,078 shares of Common Stock outstanding as of September 29, 2009 (the sum of (a) 1,116,822,680 shares of Common Stock outstanding as of August 25, 2009, plus (b) the issuance of approximately 452,707,871 additional shares of Common Stock upon the conversion of certain Debentures, plus (c) the issuance of 80,226,756 shares pursuant to a public offering by E*TRADE, each as reported to the Reporting Persons by the Issuer on September 23, 2009, plus (d) the 112,594,771 shares of Common Stock issued upon the conversion of Debentures held by CEF as of the filing date for Amendment No. 16); the percentages reported herein also take account of the shares of Common Stock into which the Debentures owned by CEF are presently convertible (subject to the limitations stated in the indenture), as described below. The Reporting Persons own 166,163,940 shares of Common Stock of the Issuer (not counting shares issuable upon conversion of the Debentures) and approximately $913,247,000 million face amount of the Class A Debentures. The Class A Debentures are convertible into Common Stock of the Issuer at the price of $1.034 per share subject to certain limitations upon such conversion. Pursuant to section 12.01(b)(i) of the indenture for the Debentures, no holder may convert Debentures to the extent that such conversion would cause such holder to “beneficially own, as defined in Rule 13d−3 of the Exchange Act, in excess of 9.9% of the Common Stock outstanding immediately after giving effect to such conversion.” In light of the number of shares of Common Stock outstanding and the number of shares of Common Stock owned by the Reporting Persons, the Debentures held by CEF are presently convertible into 9,205,900 shares of Common Stock.
This means we need to alter our expectations just a bit. If we are assuming approx. $600m of profit from the brokerage business, then with the new number of shares outstanding, then our full year earnings for the unit fall to $.34 from $.50 due to the dilution.
That also means that at a 15 PE for the unit, we come to a price of $5.10 and at a 10 PE, we come to $3.40. For reference, competitor Ameritrade (AMTD) trades at 18 times earnings so we are being conservative in the assumptions. In either case, the low end value the brokerage unit at near twice the current share price.
While the dilution is not ideal, retiring debt paying 12% annually is a very good things as it adds to the company’s liquidity. Since our main concern now is the balance sheet and getting that healthy, this all is akin to medicine that tastes bad, your not too fond of it but the end results will be what we want.