Schwab Brokerage Founder May Reap a Huge Profit on Stock Offering
Less than three months after buying back his discount stock brokerage firm from BankAmerica, Charles R. Schwab is planning to offer shares in his enterprise to the public--at what could be a breathtaking profit.
Investment banking sources said Friday that Charles Schwab & Co. has retained First Boston and Morgan Stanley to manage an initial public offering of about 20% of the company.
Knowledgeable investment bankers’ estimates of the company’s valuation varied widely--from $350 million to as much as $800 million. In March, a group led by the 49-year-old Schwab bought the company from BankAmerica for $230 million.
In addition, BankAmerica received the right to a second payment equal to 15% of the appreciation in Schwab’s value. The right can be exercised at any time between a public stock offering and 1995.
The firm hopes to file a registration statement with the Securities and Exchange Commission before the end of July, the sources said, although a plan to allocate a large chunk of stock to the Schwab firm’s customers could delay the offering.
The shares to be sold will be newly issued by the company, rather than sold by individual shareholders, and the proceeds will be used to retire debt that the firm took on in the leveraged buyout and for expansion.
Despite BankAmerica’s right to part of the appreciation of Schwab’s value, the estimated valuations of the company “make it look like another botched deal by BankAmerica,” said one West Coast investment banker.
During his negotiations to repurchase the company, Schwab had threatened to abandon the firm if it were sold to someone else. Sources said he also raised the possibility of filing suit against BankAmerica to rescind its 1982 purchase of the company for $57 million in stock.
“Schwab had a unique lever,” said a West Coast investment banker whose estimate of Schwab’s value is at the high end of the spectrum. “But I question whether it was a $500-million lever. The bank left a lot on the table.”
Another investment banker who is familiar with Schwab’s plans said: “BankAmerica looks dumb.”
A BankAmerica spokesman said it is premature to comment on Schwab’s planned offering. The troubled parent of Bank of America booked a $130-million pretax profit on the sale of Schwab in the first quarter. The sale of the Schwab firm also helped BankAmerica to fend off a hostile takeover offer from Los Angeles-based First Interstate Bancorp.
A Schwab spokesman declined comment, although Schwab himself has made no secret of his intention to eventually take the company public.
Investment banking sources said Schwab had been talking about a deal that values the company at $800 million, or about 13 times estimated 1987 earnings of $50 million. Two investment bankers agreed that this was a reasonable valuation of the firm.
The brokerage netted about $32 million last year on revenue of $308.6 million.
But one San Francisco investment banker who is very familiar with the firm argued that a multiple of its $150-million book value, or net worth, was more appropriate. “There is very little equity in that company,” he said, and despite a surge in business this year, Schwab’s debt service is high. “I’d value the company at $300 million to $400 million,” he said.
The company and its advisers must come to terms with the diverging valuations when they price the stock for its public offering, and in fact there are indications that this may be delaying the offering.
“We initially had an aggressive schedule, but it is slipping,” a source close to the company said.
