E*Trade to benefit from Citadel cash infusion

By Lisa Kerner

Charlotte, N.C., Nov. 29 - E*Trade Financial Corp. said it is getting a cash boost of $2.5 billion thanks to a transaction led by affiliates of Citadel Investment Group. The deal includes immediate funding of some $2.4 billion with the remaining $150 million expected to fund by Jan. 15.

According to E*Trade, the investment "fortifies the company's balance sheet, allows the company to focus on its core retail business and provides additional capital to manage credit risk."

E*Trade's board unanimously concluded that the transaction with Citadel provides the greatest benefits to its shareholders and other constituencies. The decision was the result of the company's review of strategic alternatives that included discussions with potential strategic and financial partners.

Under the terms of the Citadel agreement:

• E*Trade will receive $1.6 billion of capital in exchange for 12.5% senior unsecured notes and common stock;

• Citadel will acquire E*Trade's entire asset-backed securities portfolio, including collateralized debt obligations, for $800 million in cash; and

• Citadel will invest an additional $150 million in exchange for 12.5% senior unsecured notes and common stock at closing.

In addition, Citadel will nominate one representative to E*Trade's board of directors.

E*Trade is expected to issue stock equal to about 19.99% of its current outstanding common stock.

Effective Thursday, E*Trade has divested itself of its $3 billion asset-backed securities portfolio, including its ABS collateralized debt obligations and second-lien securities.

E*Trade also announced the appointment of R. Jarrett Lilien as acting chief executive officer, succeeding Mitchell H. Caplan who stepped down from the position. Caplan will continue to advise the company on transition matters through the end of the year, while Lilien will remain a member of E*Trade's board, according to a company news release.

Donald H. Layton, a special adviser to E*Trade's board, will become chairman of the board, succeeding George A. Hayter who will remain as a director. Layton spent 29 years at JPMorgan Chase, most recently as vice chairman.

"This transaction with Citadel is not only a major vote of confidence from one of the world's leading financial institutions but also allows us to directly address customer concerns and get back to our real business, which is providing industry leading products and services to our customers," Lilien said in the release.

E*Trade was advised by Evercore Partners Inc., J.P. Morgan Securities Inc. and Davis Polk & Wardwell.

The New York-based E*Trade family of companies provides financial services including trading, investing, banking and lending for retail and institutional customers.

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