Is NetBank More Valuable After a Citigroup/Egg Merger?

Stock tickers: NTBK, C

NetBank Inc. (NTBK-NASDAQ) is a stock that referring to it as ‘in trouble’ would be an understatement.  Its large online banking customer base would be attractive to a larger company, but the problem is that the value has not ever been evident and it has seen declining customer numbers and seen a decline in its fundamentals for a long time.  Valuing customers is a key metric for most online businesses, although it isn’t possible to turn each customer into a widget.  So a customer of one bank and financial service company won’t be what it is worth at another, and that is more so from country to country.

But take a stab at it and try to draw the comparison.  NetBank has been losing customers and their loss rates would put the current customer base at roughly 260,000.  Today’s market cap is $178+ million.  Using some simple math puts the value per customer based on today’s market cap as roughly $684.00.  The problem is that NetBank is no longer profitable and there is not expected to be profits any time soon.  The inverted yield curve really chews into operations and they no longer have a robust mortgage loans like in 2003 to 2005.

NetBank customers were quantified at 268,769 customers at the end of last quarter and if you consider the base has been declining it would be ‘around’ 260,000 now.  Their market cap after the recent stock drop is $178+ million.  So the value in market cap per customer is roughly $684.00 per customer.  Let’s be nice and say they managed to grow back to 300,000 customers: that still yields a value of $593.00 per customer.  Even their ATM locations have been shrinking.

Egg has 3 million customers (listed as ‘more than 3 million’) for $1.13 Billion paid by Citigroup (C-NYSE), and with such a large additional customer base you would argue that the large block of customers is worth even more.  Based on the purchase price this yields Citigroup buying Egg for $376 per customer.  For such a large block it seems a steal, but the fact that this is UK-based makes yet one variable in trying to make customers into widgets.  Egg is operating at a loss as of the most current data, and here is what we covered on it early this morning.

We really panned NTBK stock on July 26 thinking this was going lower on weakening fundamentals and its stock was just under $6.00 back then.  Shares now sit at $3.87, and from a fundamental standpoint the "value" doesn’t look any better now than it did then.  It may even be worse. 

NetBank is losing money, they raised cash in a share sale at slightly higher prices recently, they have shareholders who are just about all ‘Long and Wrong,’ and they are projected to lose money for the foreseeable future.  One thing can be said here regardless of spinning apples and widgets, or at least maybe you can ASK one thing.  So the question is: Is there any value here at all?  As recently as the end of 2004 this stock was over $10.00, it slipped to under $5.00 in what looks like a steady decline by the end of 2006 and is barely off lows now.  The company is also trying to complete its ongoing restructuring, but this has been a long and painful ‘restructuring’ for shareholders.

The short interest in this one actually fell from December’s 2.567 million shares short to January’s reading of 2.504 million.  Maybe things have bottomed, maybe they haven’t.  The new management has some serious work and a serious sales job ahead of it to keep people interested in this one.

Jon C. Ogg
January 29, 2007