On Monday, one of the worst kept secrets became official – Toronto-Dominion Bank (TSX:TD) announced it was selling its stake in TD Ameritrade as part of Charles Schwab’s $26 billion takeover. TD Bank owns a 43% stake in the United States brokerage and once the deal closes, it will own a 13.4% stake in Schwab.
Upon closing, Schwab will become one of the largest U.S. brokerages with $5 trillion in client assets and 24 million client accounts. TD’s position in Schwab is expected to be subject to a short lock-up period and it could dispose of its assets as early as 2021.
It is important to make note of this, as analysts fully expect the company to dispose of its 13.4% stake in Schwab to fund future U.S. retail acquisitions. TD’s stake is estimated to be worth $13 billion, and could provide a significant capital injection. This is all assuming the deal passes U.S. antitrust scrutiny.
This is a smart move for TD Bank (TSX:TD)
Exiting the ultra-competitive brokerage space is smart move for the company. The current brokerage commission wars is expected to have a significant effect on TD Ameritrade’s profitability. In early October, Schwab made the move to zero commissions, a landmark move that had repercussions across the sector.
Analysts forecasted that for every 10% drop in TD Ameritrade earnings forecasts, TD’s would drop by a corresponding percentage point. The reality is, at zero commissions TD Ameritrade is no longer the cash cow it once was. John Aiken, analyst at Barclays called this an “elegant solution to a potential loss of revenue from its U.S. business”.
The move is timely, and provides TD a clear path to exit the space and at the very least, gives it ownership in an industry leader. Schwab expects to achieve $4 billion in synergies which will be achieved for the most part through cost-cutting. Either way, the company is better off with Schwab than competing against it.
The markets have been waiting for TD to make a move for some time. The bank has not made a significant acquisition in the U.S. since 2010, and it appears the company is positioning itself to become active in the space.
TD Bank is one of the best capital allocators in the space and is largely considered to be one of the more conservative banks. Therefore, it is not surprising to see them exit what is at the moment, a highly competitive and volatile space.
The company was faced with two choices – go all-in and double-down on U.S. discount brokerages or find a way to exit the space. The general consensus is that the deal is the right strategic move for the company. I agree.