TD Ameritrade and its largest stakeholder, Toronto-Dominion, buy Scottrade for $4 billion

Deal combines two of the largest online brokerages and expands US operations of Canada's second-largest lender

Oct 24, 2016 @ 7:31 am

By Bloomberg News

TD Ameritrade Holding Corp. and its largest stakeholder, Toronto-Dominion Bank, agreed to buy Scottrade Financial Services Inc. for $4 billion, combining two of the largest online brokerages while expanding the U.S. operations of Canada's second-largest lender.

TD Ameritrade agreed to acquire Scottrade's brokerage operations for about $2.7 billion in cash and stock, the firm said Monday in a statement. Toronto-Dominion, which owns about 42% of TD Ameritrade, will purchase Scottrade's banking operations for $1.3 billion in cash, adding to its U.S. branch network that stretches from Maine to Florida, the Toronto-based lender said in a separate statement.

The deal is expected to be completed by Sept. 30, 2017, with clearing operations moving to TD Ameritrade systems the next year. About 28 million shares in TD Ameritrade will be issued to Scottrade shareholders and Toronto-Dominion will purchase another 11 million shares in the company, which will help fund the $1.7 billion cash portion of the price. The companies expect $450 million in annual cost savings, with a quarter of that coming in the first year after the close.

(More: Another TD acquisition this year targets big data)

The acquisition of Scottrade adds to a flurry of recent deals in an industry that's facing pressure from lower trading volumes and sluggish revenue growth. E*Trade Financial Corp. bought Aperture New Holdings Inc., parent of the futures and options trading platform OptionsHouse, in a $725 million cash deal in July, and Ally Financial Inc. purchased TradeKing Group Inc. for about $275 million a month earlier.

Toronto-Dominion extends its U.S. acquisition streak with this deal. The Canadian bank has spent more than $17 billion building a U.S. branch network since 2005 and has sought to fortify its wealth-management business since buying New York money manager Epoch Investment Partners in 2013 to attract more wealthy American clients. The lender has more recently focused on buying credit-card portfolios, though Chief Executive Bharat Masrani said as recently as September that he's still interested in “tuck-in acquisitions” and other U.S. assets if they make strategic sense.

TD Ameritrade, based in Omaha, Neb., has a market value of $19.5 billion. Closely held Scottrade, based in Town & Country, Mo., had $1.04 billion of revenue in 2015, Wells Fargo & Co. analysts led by Christopher Harris said in a report this month.

(More: TD's Skip Schweiss to RIAs: Don't shrug off DOL fiduciary rule)

Online platforms are used by consumers, wealth advisers and other investors to trade securities outside of traditional brokerages. The brokerages have been squeezed in recent years amid competition from automated investment systems known as robo-advisers and a shift away from stock picking and day-trading toward passive vehicles.

SCOTTRADE CO-FOUNDER, CEO

Scottrade CEO Rodger Riney, who co-founded the discount brokerage in 1980, will join the TD Ameritrade board of directors as part of the deal. Mr. Riney's 75% stake is valued at $2.2 billion, according to the Bloomberg Billionaires Index. The company announced last year that he was undergoing treatment for multiple myeloma, a form of blood cancer.

Scottrade's business is profitable, but less than its peers, and the company's revenue hasn't grown since 2014. These challenges, along with Mr. Riney's health, could influence the decision to sell, the Wells Fargo analysts said earlier this month.

TD Ameritrade was created in January 2006 when the former Ameritrade Holding Corp. bought Toronto-Dominion's U.S. network of independent advisers, TD Waterhouse. In exchange, the bank received a large stake in the combined firm. The companies have maintained close business ties. Last year, Tim Hockey left the lender, where he ran Canadian banking and wealth management, and became TD Ameritrade's CEO.

Barclays Plc is advising TD Ameritrade, while Goldman Sachs Group Inc. is serving as Scottrade's adviser on the deal. Wachtell, Lipton Rosen & Katz and Sullivan & Cromwell are the respective legal counselors.

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