Analysis: Who Could Be Bidding for GAIN Capital

There is only a limited number of prospective bidders for the NYSE-listed retail brokerage

Yesterday’s news that GAIN Capital could be up for sale sparked numerous speculations on the part of industry insiders. While some stories are believable, others are outright far fetched. In this article, we will attempt to list all of the possibilities around the sharp move higher in the share price of the US-listed brokerage that occurred yesterday.

First and foremost, let’s highlight that the company nor any prospective bidders have issued any official statements on the matter. We can speculate as much as we would like on who might be interested in acquiring the US brokerage. However, there is no definitive proof that anyone is going to.

With the source of the rumor being a UK-based subscription service for market rumors, we could be dealing with just that – an unconfirmed statement that is aiming to move the share price.

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That said, the current market cap of GAIN Capital is $184.8 million, a figure which is far from the acquisition budgets of the bulk of the FX industry, especially in today’s complex regulatory world for the retail FX market globally. Regardless, let’s start exploring the options on the table, regardless of their realistic likelihood.

Possible But Unlikely Buyers

Let’s start with assuming that the acquisition rumor is true. While the official message on the site Betaville stated that Plus500 is the bidder, the London-listed company’s share price didn’t react to the announcement in any material way today. While the firm does have significant resources at its disposal, putting them to work on such a big deal so soon after ESMA seems very unlikely.

Moving on, IG Group clearly has the resources to execute such a big deal, but the company just started its US operations a couple of months ago. It is therefore very unlikely for the UK broker to be a bidder for another US brokerage right after going through the complex, expensive, and lengthy process of acquiring a license to operate in the USA.

Looking at the next UK-listed brokerage, CMC Markets, we have to take into account that its own market cap is about double that of GAIN Capital, currently just above $350 million. Since the transition for the European industry into a different regulatory framework has been rather painful, the number of cash reserves at the disposal of the company make such a large bet very risky.

Jefferies Going All-In?

Here is where it gets interesting: what if the savior of FXCM, Jefferies could be going all-in on its retail forex bet? While this also seems to be a far fetched option, the company is the only one in the industry which has a material cash reserve and the talent to integrate such a significant deal into its portfolio.

GAIN Capital has been trading close to all-time lows just before the acquisition rumor and recently, the poison pill strategy which the firm undertook to protect itself from an FXCM bid years ago, just lapsed after a three-year renewal which was announced in April 2016.

Jefferies could become the largest player in the US market by far, and with the expertise of FXCM’s talent which it retained and the newly acquired GAIN Capital brand together with FOREX.com, it could be setting itself as the main contender in the US market for a long time to come.

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A Cash-Rich Australian Broker

Over the past year, Australian brokers have made a killing on the market. Too many European clients flocked offshore, and the land down under has been the most attractive destination with its relatively loose policy towards leverage offered to retail clients.

There are at least three cash-rich Australian brokers that I can think of who could be keen to remain in business and expand into the G7 jurisdiction with the highest leverage allowed for retail traders. With its 50:1 gearing, the US has become just that. Yet another proof how quickly a tide can turn when we talk financial markets.

Not a Publicly-Listed Broker

From a big Chinese investor to a Russian oligarch and a large Cyprus-based brokerage, the likelihood that another firm not mentioned above is looking into GAIN Capital is very far fetched. While a number of companies could theoretically be in for such a deal, let’s not forget that any acquisition would have to be approved by the national regulators.

Chinese investors have been having a hard time getting money out of China, and while the same can’t be said about Russian oligarchs, who already store most of their wealth outside of Russia, the political landscape simply doesn’t feel right in today’s world.

Cyprus-based brokers have enough on their minds already, trying to survive in a difficult market where a big part of their clients have been driven offshore, and such a huge investment from that area of the EU seems quite unlikely.

A New Large Investor

With the market conditions complicating since the start of the year and revenues per million declining materially for GAIN Capital over this period, the company might have attracted a new large institutional investor.

While such a scenario is not confirmed by the brokerage officially, the dramatic share price move could be an indication that a new long-term investor is willing to put up a significant amount of money and make a bet on the future of the firm.

Whether this is a hostile takeover attempt or not, we are yet to find. GAIN Capital has not undertaken any exclusive steps to protect itself from such a scenario for the time being.

Just a Speculative Play

Let’s not forget one last option. In the end, this rumor mill play can be just another normal day on the market. As the Gordon Gecko character played by Michael Douglas in the first movie called Wall Street says: “Greed is good.”

There is no official confirmation from any side about a prospective transaction. A hostile takeover is still possible, albeit not probable. That said, pressure on the part of the company’s board could be putting the brokerage up for sale before it concludes with its cost-cutting effort started some time ago.

Low volatility throughout the first half of this year has been painful for most heavily-regulated brokers. Unfortunately for the end-clients, this ultimately means more consolidation and less competition. Welcome to “a brave new world”!

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