We have all heard the name, but let’s recap who Teddy Sagi is in short – the majority shareholder of TradeFX, also known as Markets.com, and previously known as 3G Forex and GFC Markets. The entity is now operating an umbrella of companies under the Cyprus Securities and Exchange Commission (CySEC) regulated holding firm Safecap.
The company also owns the binary options broker TopOption and several other smaller brands. Recently, Playtech acquired the whole business package for €458 million ($515 million), signaling its major interest in diversifying into retail online financial trading.
Under Sagi, Playtech (33 percent of which is owned by him) also ventured into the binary options software market by launching Keystone. The white label technology provider which utilized much of Playtech’s highly experienced development workforce was intended to compete with the likes of SpotOption and Tradologic.
At this stage, the adoption of the platform remains slow with the largest brand powered by the software being Playtech’s own TopOption.
Sagi, a known fan of simply named domains such as markets.com, market.com, pay.com, etc. is also rumored to be associated with the stock.com website which could also possibly see a similar road to acquisition by Sagi’s Playtech vehicle later down the road.
The “multiplier arbitrage”
Teddy Sagi implements a highly interesting strategy which we can coin as “multiplier arbitrage” – given that many firms in the market aren’t able to keep growing beyond their current figures and that there’s a lack of M&A activity, he understands that many of them are ripe for acquisition even if at slightly lower multipliers than their worth.
He also knows that he’s one of the few people who can take such companies public, whether individually or within a group, and achieve much higher multipliers. For instance, Sagi’s group is offering companies multipliers in the region of 4-7 while in capital markets he expects to achieve 9-12, hence the arbitrage.
This strategy works quite well for all those involved in the eco-system: The owner of the broker is selling his firm and getting an exit, and while the price he gets might be lower than his dream value, he doesn’t usually have any another alternative to exit from his investment.
It’s a win-win situation where Playtech gets a bargain and creates synergies with existing firms in its portfolio like markets.com for example. Later on, this whole portfolio, part of it, or even individual companies may be resold or taken public at much higher multiples.
This is why Playtech/Teddy Sagi are involved with quite a few deals, the details of which we are handing to our fellow readers below:
So far it seems that the company’s problems were purely technical. Changes in its compliance personnel combined with it being completely unprepared for a massive review of a large number of existing accounts as abruptly (but not unexpectedly) required by the FCA, caught Plus500 off guard. The major delays caused by the event prompted a halt in processing deposits and withdrawals and even hampered clients’ ability to trade.
The company also did a poor job in communicating this to its clients and the markets, which further aggravated its problems, leading to Playtech’s takeover attempt valuing the firm at about 40% less than its market cap just 10 days prior to the events leading to the offer.
The situation is now a peculiar one: the deal has been delayed, with voting expected only a month from now, putting this tentative agreement at a great risk. Plus500 is showing signs of recovery and in a month’s time may completely solve its compliance issues and rebound in its market position.
There’s the other side of the question too – the firm’s business model sustainability. Plus500 as we know it is going to materially change, given that it cannot operate differently to other FCA regulated brokers anymore. The ease with which new clients were opening accounts was a huge advantage over the firm’s competition up until now.
On one hand, Plus500 may recover from its compliance issues, but on the other hand, it may become just another London-based broker competing on the same terms with other British brokers, and in any case, its short-term profitability is going to significantly suffer from the downtime related to compliance issues.
Still, the broker may get back into the game in other markets outside the UK, funneling non-British clients to its newly established Cyprus operation and venturing into other territories such as the Middle East and Asia where it has not been highly active until now.
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In addition, while a remote possibility, CySEC could take cues from the FCA and enforce a similar anti-money laundering procedure for firms regulated on the island at some point. In fact, a number of Cyprus regulated companies have already been actively conducting detailed know-your-customer (KYC) verification procedures before clients can deposit their funds.
Such a foray will require large investments and a lot of trial and error marketing attempts just like Plus500 experienced in its first days until its famous Marketing Machine hit the right track – whether current shareholders of Plus500 have the patience for this is a question that will be answered in a month’s time.
As first reported by Finance Magnates, Sagi was in touch with Ava over a month ago trying to get a deal done valuing the company at $90 million. However, since more lucrative deals such as Plus500 has consumed the group’s attention and due diligence resources, the deal with Ava hasn’t made any progress and still in the same place as a month ago.
Ava’s shareholders will probably not be able to resist a sale as the company is considered quite a mature one in the market and perhaps it’s time for them to move on, but as usual the biggest challenge is the proposed valuation. It’s worth noting that in its first days markets.com in was structured in many ways to emulate Ava’s business model and was a company the market looked up to for many years, especially in terms of marketing.
Markets.com and Ava still share a lot of synergies and merging the companies under one group would float a lot of value to the parent company. The deal still remains a very likely one, however that would surely depend on the outcome of the Plus500 deal.
As first reported by Finance Magnates, at least one meeting took place in Cyprus between Markos Kashouris and Sagi’s team, however that’s pretty much where the deal ended and it seems highly unlikely that any progress will be made in that direction.
Finance Magnates is aware of a bid that was put up by Playtech for 24option amounting to $90 million, however was swiftly rejected. 24option stands out in the binary options market by being a very well operated brand and also the largest binary options broker in the world, netting about $9-12 million in deposits every month with about $1.5-3 million in margin.
Acquisition of such a brand would be highly synergistic to Playtech’s operation given its ownership of another large brand TopOption which is netting about $4-6 million a month in deposits. Another target could have been Banc de Binary which is transacting only slightly less than 24option, however, its complications with the U.S. regulators would take it completely off Sagi’s radar.
Finance Magnates is aware of ongoing discussions between the broker and Sagi’s team, however the main point is the valuation with the UFX team looking for a x8-10 multiplier which Sagi isn’t ready to meet.
UFX is a massive broker which has managed to stay relatively under the radar until recently, and it would not be unlikely for the company to net $20-30 million a year in net profit valuing the firm at $200-300 million given the higher multiples, making it a potential IPO candidate. The UFX team isn’t rushing into striking a deal which could net the shareholders $100 million less than it feels it could achieve over an IPO.
An affiliate management software used by many online trading companies has been of interest to Playtech. The status of the conversations isn’t clear but in any case it is a rather small deal, circa $5-10 million.
Other Potential Deals
It is quite certain that Sagi’s group is reviewing many more deals than listed here. Given the “multiplier arbitrage” strategy, pretty much any deal may be of interest to his group provided the numbers are right. While we aren’t aware of discussions taking place with any of the firms below, they may provide a synergy to Playtech’s portfolio:
HasOffers – large competitor to Cellxpert which has a massive synergy with Playtech’s new financial portfolio since it will give the buyer more access to the marketing and data analytics vertical.
TechFinancials – the first binary options software provider to go public is only valued at £19 million ($29 million) making it a lucrative target for the group and will supplement Keystone’s portfolio giving it direct access to almost 100 white labels, including an already existing target: 24option.
Worth noting is that Teddy Sagi completely avoids any company doing illegal or unregulated business, especially in the United States. Hence any firm that is or was involved with such a business will automatically be discarded no matter the multiplier.
To summarize, there’s no doubt we will see a continuation of this activity in the coming months and quite possibly a massive group of financial trading companies will be created, and then spun off, under the Playtech umbrella. Stay tuned!