It was a deal that had to happen.
After four months of planning a secondary offering, online brokerage
scrapped it on July 28 and replaced it with a $200 million sub-convertible bond offering that started trading two days later.
For Ameritrade, the result has been a no-confidence vote from the institutional investing community. Long a favorite of the retail sector, Ameritrade is finding that its attempt to bring a more high-profile shareholder base into the fold came at a price the online brokerage hadn't planned on.
Priced at par, or $1 for $1, the bond opened lower on July 30 and sold down into the mid-80 cents range this week before recovering a bit to close Thursday at 91 1/2 to 92 cents on the dollar. During Friday trading, it was back down to 88 1/2 to 90 cents.
"This one has imploded pretty quickly considering that it's only been trading since the 29th," says Adrian Miller, a convertible bond analyst at
Salomon Smith Barney
. (Salomon wasn't involved in the offering.) And three bankers say there's more to the issue's struggles than simply the rocky market conditions of the past two weeks.
, the deal's lead underwriter, declined to comment.
Omaha, Neb.-based Ameritrade first started talking about a secondary offering during a shareholder meeting this spring and finally announced plans for a more than $250 million equity offering as well as a convertible trust offering at the end of June. It started a road show in mid-July to pitch the deal to institutional investors. On July 27, Goldman Sachs still planned to price the deal the next day.
On the afternoon of July 28, however, word began leaking out that the deal wasn't going to get priced after all. By 8:30 p.m. EDT, Ameritrade had issued a statement saying that the secondary had been pulled due to "current market conditions." Both it and the accompanying trust, what Goldman calls a TRACES trust, were to be replaced with a convertible offering.
But it was more than just the market, say two bankers at firms that weren't involved in the offering but are familiar with the situation. Ameritrade couldn't fill the book because the institutions thought Ameritrade's valuation was just too high. On the day the secondary was pulled, for instance, Ameritrade's price-to-earnings ratio was 155, based on fiscal 2000 earnings estimates.
By chance, the mid-July road show was taking place just as concerns about slowing growth in online trading began rising. These worries have since been justified by estimates from
Credit Suisse First Boston
that online trading was flat in July compared with June. Ameritrade's stock was suffering. From July 6, the first trading day after it split three-for-one, the online broker's shares fell 32%.
'This one has imploded pretty quickly considering that it's only been trading since the 29th.' -- Adrian Miller,
Salomon Smith Barney
Clearly, there wasn't much interest from investors, says a trader at a firm not involved with the deal, adding that he was surprised they had to go through the whole road show to figure that out.
"Doing this deal is almost like holding a re-IPO without the discount," the trader says. "It's hard to place these Net stocks since investors cannot expect to see the pop they did with the IPO."
In addition, selling by J. Joe Ricketts, Ameritrade's chairman and co-chief executive, didn't make the story any easier for investors to swallow, the trader notes. "If you see management selling to take their chips off the table like that, it becomes an issue with investors."
Ameritrade had planned to sell 8.5 million shares in the offering, and selling shareholders, Ricketts and his wife, planed to sell 1.5 million shares. The underwriters also had the option to buy another 1.5 million shares from the selling shareholders, in their overallotment allowance. A second offering involved the forward sale of another 4 million of Ricketts' shares (up to 4.6 million shares with the overallotment) through the convertible trust. This does, however, account for only a small percentage of the Ricketts' total holdings.
When institutions didn't bite, bankers at other firms say, Goldman tried something different. By then, however, it didn't have much leverage with the buy-side. Goldman, working alone after having had Credit Suisse First Boston,
U.S. Bancorp Piper Jaffray
on the first offerings, had to accept some unfavorable terms to get the deal done, and according to the two bankers at firms not involved in the offering, may have ended up holding onto a large part of it.
The bond's coupon was priced at 5 3/4%, at the high-end of its range, and the conversion premium was lowered to 22%, the low end of the range. On a $200 million bond offering, that means Ameritrade likely will pay $5.75 million in interest every six months. Investors, meanwhile, can convert shares at a price of $32.78 each. The stock closed Thursday at 23 7/16, up 16% on the day but down 12% from the previous Thursday, the night the deal was priced, when the stock was at 26 11/16.
If the stock is trading at 50 a few years from now, that's good for the bond investors, explained another rival banker. But with the stock now trading in the low 20s, the likelihood that investors will convert the bonds into stocks has declined. Instead they'll be lining up for their piece of Ameritrade's $200 million.
"If people were very comfortable they were getting their money back in 2004, they wouldn't let
the convertible trade into the 80s. It shouldn't have traded this low," says Steve Seefeld, president of
The people, in the case, are institutional investors. Like the majority of convertibles, this one was issued as a 144a, which means that it initially doesn't have to go through the
Securities and Exchange Commission
filing first. In most cases, such bonds open to the general public after 90 days.
Even if they're professionals, they're still worried.
"What is my downside risk, downside volatility? How much am I getting paid for the risk I'm taking?" asks Miller at Salomon Smith Barney. "In bad times, portfolio managers will look at all their investments and see what they really have, and assess their downside risk."
Gregg Wirth contributed to this report. As originally published, this story contained an error. Please see our
Corrections and Clarifications for details.