WASHINGTON - The Office of Thrift Supervision has delayed to Feb. 9 its decision on E-Trade Group Inc.'s application to buy Telebanc Financial Corp., a move the electronic brokerage said could sink the deal.

E-Trade of Menlo Park, Calif., needs regulatory approval to buy Telebanc, parent of Telebank, an Internet-only thrift based in Arlington, Va. Their June 1 deal allows either side to walk away if the merger is not completed by Dec. 31.

The OTS originally anticipated ruling on the application in September, then set a Dec. 26 deadline, and finally pushed back its decision to Feb. 9. Several factors forced the latest six-week delay, including a dispute over Softbank America Inc.'s stake in E-Trade.

E-Trade flagged the regulatory delay for shareholders in a Nov. 22 Securities and Exchange Commission filing. "In order to complete the merger by yearend 1999, we will need [OTS] to act on E-Trade's application on a schedule faster than their standard processing timetable," the filing stated. "It is possible that we may not be able to complete the merger prior to Dec. 31, 1999."

The value of the transaction is $1.28 billion, according to the SEC filing. That's down from the original $1.8 billion valuation. Since the deal was announced, E-Trade's stock has fallen almost 21%, to $31.125 a share.

Just since the SEC filing, E-Trade's stock price dropped 13.5% from Nov. 19 - the trading day before the announcement - to $30.875 at Monday's close. Telebanc slipped 22.5%, to $26.75, during the same period.

Analysts are skeptical a merger will take place.

Scott Appleby, an analyst in San Francisco at Robertson Stephens Inc., a subsidiary of FleetBoston Financial Corp., predicted the E-Trade and Telebanc would call it quits if OTS does not approve the application by yearend. "If they really wanted to send a signal they would have extended the walk-away date," Mr. Appleby said.

But in an interview Monday, Telebank president and chief executive Mitchell H. Caplan was upbeat.

"We are doing everything we can to get the deal closed by the end of the year," he said. "Anything anybody else says is in my opinion speculation based on how they interpret the [SEC] document."

He complimented the regulators, saying the "OTS is doing a great job."

"It is a slow process and a complicated deal, and they [OTS] want to understand it and they want to make sure that when they approve a deal, they are comfortable."

Regulators are reportedly concerned that E-Trade's largest shareholder, Softbank America Inc. of Newton Center, Mass., has a controlling interest in the electronic brokerage and should therefore be subject to thrift supervision. OTS considers ownership of 25% or more of voting stock or capital to be "conclusive control."

While Though Softbank, a subsidiary of Softbank Corp., Tokyo, exceeds that threshold today, its stake in E-Trade will be diluted to 22.6% by the Telebanc deal and another acquisition. The OTS permits companies controlling less than 25% to persuade the agency that they do not exert a controlling influence. This assertion is known as a rebuttal of control, and Softbank filed one on Aug. 5. A Softbank representative declined to comment Monday.

According to E-Trade's Nov. 22 SEC filing, the issue could kill the deal.

"No assurance can be given that the [OTS] will accept Softbank America's rebuttal filing," E-Trade said. "If [OTS] does not accept a rebuttal of control from Softbank America, regulatory approval of the merger would not be obtainable, and the merger could not be completed."

What if Dec. 31 comes and goes without an answer from the OTS?

"We have not announced what will happen after that point. That is because nothing has been decided," Mr. Caplan said. "For now we are focussing on getting through the regulatory process and setting a shareholder date."

- Steven Marjanovic contributed to this story

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