Schwab's OptionsXpress Buy Could Be the First of Many: Analysts

NEW YORK ( TheStreet) -- Charles Schwab ( SCHW)'s acquisition of OptionsXpress ( OXPS) for $1 billion in stock could spur more consolidation in the options sector, according to analysts.

"There are many smaller options players that are privately held and then there are firms like TradeStation ( TRAD) and FXCM ( FXCM) or GAIN Capital Holdings ( GCAP) that have received a pop in share price on the assumption that they could also be takeout targets," said Morningstar analyst Michael Wong.

On Monday GAIN Capital closed up eight percent, TradeStation was up four percent and FXCM was up almost two percent.

Wong said that retail investors have become more sophisticated and are now frequently using options and the acquisition of OptionsXpress is logical because it fills in that gap for Schwab. He added that any of the smaller companies in the options sector may be targets of TD Ameritrade ( AMTD), but would not likely fit in with the larger brokerages.

Other analysts such as Sandler O'Neill'sRichard Repetto countered that an acquisition of these smaller companies is unlikely.

"This is a onetime deal, and Schwab bought a company with a specific capability. It is something those other firms don't have," Repetto said.

Under the terms of the agreement, OptionsXpress stockholders will receive 1.02 shares of Schwab stock for each share of OptionsXpress stock. Based on Schwab's closing stock price as of March 18, 2011, the transaction values each OptionsXpress share at $17.91. This means, Schwab is paying 10 times EBITDA and eight times 2012 revenue.

" The deal price the acquisition price was pretty reasonable and Schwab's stock was undervalued. Perhaps if they had paid more in cash it may have been better for Schwab shareholders," said Wong.

Doug Sipkin of Ticonderoga Securities said in a note that excluding the $55 million in restructuring the deal could be modestly accretive, brining in $80 million pre-tax or about four cents Schwab estimates that annually the combined organizations would have generated net revenues of $4.479 billion in 2010.

"The transaction will help to fill an options gap at Schwab. Options DARTs will increase 66% based off Q4 numbers. Trading revenue will increase to 21% of run rate revenue from 18% of revenue," said Sipkin in his note.

Repetto said that the majority of the revenue will likely initially come from putting OptionsXpress client cash balances to Schwab's Bank.

"Taking OptionsXpress customer assets of $8.1 billion at February 28 and assuming that approximately 40% is in cash, we estimate that $3.2 billion in balances could be swept to the bank. If Schwab earns an incremental 100 basis points on those balances, it could equate to $32 million in revenue," said Repetto.

The transaction is expected to close in the third quarter of 2011.

--Written by Maria Woehr in New York.

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