OTS' Pending Decision Opens Door for E*Trade Bank Deal

The OTS says it finally has information to decide -- which usually means a positive decision is on the way.
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After more than six months of uneasy wrangling with regulators, it looks like

E*Trade

(EGRP)

and

Telebanc

(TBFC)

can relax a bit.

The Office of Thrift Supervision

, which regulates thrifts including Telebanc's

Telebank

unit, said Monday that it finally has enough information to decide on E*Trade's acquisition of Telebanc. In the past, that has meant a positive decision is on its way, say four people in the thrift industry.

Investors took heart in the news to close the gap between E*Trade and Telebanc shares. They sold E*Trade and bought Telebanc shares, narrowing the spread between the two to about 7% of the deal's value. Just one month ago confidence was down and that spread was 30% off the deal's valuation. Under the deal's terms, Telebanc shareholders will receive 1.05 E*Trade shares for each Telebanc share.

It's unclear, however, what E*Trade had to do to get the OTS to consider the application complete. The agency doesn't comment on applications under consideration. E*Trade spokesman Patrick DiChiro didn't have any specific information on provisions made, saying that many of the OTS' questions were outlined in E*Trade's filing with the

Securities and Exchange Commission

.

The main delay in the deal, which was announced June 1, was

Softbank America's

nearly 27% E*Trade stake. (Softbank America is the U.S. unit of Japanese venture capital firm

Softbank

.) Softbank was unwilling to be regulated like a thrift and argued that it shouldn't be because it doesn't control E*Trade. But Softbank also has indicated that if the OTS didn't accept its views on this, it would decrease its stake to a level the OTS was comfortable with to get the deal through, according to E*Trade and Telebanc officials.

Months of paperwork as well as at least one meeting between the companies and the agency on this point delayed the decision past initial expectations for September. (

TheStreet.com

has

followed the deal's ups and downs.)

So even though Softbank's control of Telebanc has been a key issue -- even mentioned in Telebanc's proxy statement for shareholders -- there is no mention of it in Monday's press release. And this issue was nowhere to be found in any of the most recent correspondence between E*Trade and the OTS that was made public by the agency.

"I would suggest that there was some confidential submission by E*Trade that answers that question," says Matthew Lee, an activist with the

Inner City Press/Community On The Move

in New York, who has followed the case closely.

With the bulk of the battle now behind them, E*Trade and Telebanc face only a few more essentially procedural hurdles. For instance, Telebanc investors will vote on the merger during a Dec. 28 shareholder meeting.

In addition, E*Trade and Telebanc need their merger filing to be processed by the SEC. The SEC is reviewing both E*Trade's filing for new shares and Telebanc's proxy for disclosure.

In a joint statement Monday, E*Trade and Telebanc said they would continue working to get the agreement done as quickly as possible. What the release doesn't mention is the fact that the two companies' merger agreement expires at the end of the year. That fact cast a shadow over the stocks earlier this month when the companies said they might not get approval before 2000 and then refused to comment on extending the agreement beyond the end of the year. Now it seems it couldn't matter less.

The OTS is allowed up to 60 days to make a decision on the merger and often uses most of its time. But it could also decide within a few days. (On the long end, the OTS can extend its time period by 30 days if it needs to, or indefinitely if an issue of law or policy comes up.)

Whatever happens in the next 10 days at the OTS, when E*Trade toasts the year 2000, its glass will be at least half full.