Is GAIN Capital getting a steal? Listening to conference call and accompanying presentation, it would appear so.
From their Merger Presentation (see slides below), GAIN highlighted the benefits of the merger. The meat was the financial data of both firm’s that was revealed. According to merger details, GAIN will be paying $107 million for GFT. But, backing out the $80 million or so that GFT has in funds, the business value comes to $27.8 million. Looking on the data below (from slide page 11) GAIN is paying around 0.3X of GFT’s 2012 revenue. Or, 0.87X of GFT’s revenues for just Q1 2013. Additionally, combining the units and achieving synergies, GAIN believes that if the brokers were merged during 2012, they would have achieved a positive $40 million (based on midrange estimate of $35-45 million) of increased EBITDA. Looking at it this way, GAIN is paying $27.8 million (in stock) to achieve $40 million or so in pre-tax earnings. Not a bad deal!
Glenn Stevens, Gain Capital’s CEO provided the following comments to Forex Magnates:
What attracted us to GFT is how complementary their business is to ours. By joining forces, we now have a much larger business overall and, importantly, the mix of our retail business will be almost evenly split between direct and partner business. We have a much larger direct business in our FOREX.com brand, while GFT has a great reputation serving their partner network – we will look to leverage their experience and their technology to build upon that going forward. GFT also has a much wider product offering, which we can now bring it to our existing customer base, and their Dealbook platform has a great reputation in the marketplace. We intend to leverage GFT’s technology as much as possible going forward.
GFT also has a very successful Sales Trader business. It’s high touch, broker-assisted business that is similar to our GTX voice execution business. This will be further complemented by GTX, our institutional ECN that’s getting very solid traction now, with volumes up 90% in the past year.
Why is this deal better than FXCM’s offer?
GAIN’s Board of Directors, which includes shareholders who represent a majority of the company’s ownership, unanimously believe that joining forces with GFT offers a better opportunity for maximizing long term shareholder value than other available options. With this combination, GAIN shareholders have the opportunity to take advantage of almost 90% of the $40mm of expected synergies, versus FXCM’s offer of 15% of a potential $50mm of synergies.
We’re enthusiastic about this opportunity to leverage our combined strengths and believe that together we’ll be larger, strong company with the financial resources necessary to innovate and lead the industry forward.
The question therefore is why in the world is GFT selling out for this amount. For the answer, we need to take a look at GFT’s 2012 figures. According to the above data, GFT achieved -$23.4 million in EBITDA, on $97.8 million in revenue. We know 2012 was especially tough for GFT, as the firm exited both the US and Japan markets (although it has white labels there using their technology) and initiated cost cutting policies. Nonetheless, even with their great Q1, GFT was only able to register $1.8 million in EBITDA. Therefore, it’s possible that GFT had entered a phase in its business where it basically saw it as inevitable that it will be burning through its $80 million cash cushion before it could consolidate and restructure its operations to be consistently successful again.
When adding the exclusive comments that GFT’s CEO Gary Tilkin provided to Forex Magnates where he answered a question of whether his firm was approached about other M&A activity as either being a buyer or sell, he said “Over the years GFT has been approached by many in the private equity and venture capital business as well as business brokers and bankers with a variety of ideas. This deal just made the most sense as a combination and it came along at the right time for me to leverage the revenue and cost synergies we could achieve as a combined group.” In response to whether he would continue to be involved with day to day activities, he answered “Yes, until the deal closes I’ll continue to run GFT as I have in the past with obvious consultation and coordination with Gain’s top management. Over time I’ll focus on the higher level issues as a board member and drop all day to day management responsibilities.”
From these quotes, it appears that this was the best deal on the table for GFT, and Tilkin found a suitable exit that would allow him to experience upside if the deal achieves the expected synergies.
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An interesting item about this entire deal is the focus on GFT’s affiliate originated volume. In the initial press release about the merger, GAIN stated:
“GFT has built an extensive network of partners throughout the world that accounted for over 75% of GFT’s retail trading volume in 2012. This strong partner business complements GAIN’s market-leading retail brand, FOREX.com, and the combined company will source approximately 52% of its retail volume from partners, with the remaining 48% coming from direct retail clients.”
Based on merged firms realizing 52% in partner led volumes, with GFT currently at over 75%, this implies that GAIN’s current affiliated driven volumes are around 35%. The importance of the partners was also mentioned during the conference call. According to data in the presentation, GFT’s 2012 volumes were $1.3T, with a breakdown of $800 billion in retail and $500 billion for institutional. They added that Q1 2013 volumes were higher by 35%, equating to around $95 billion on monthly volume.
As such, it suggests a shift in GAIN’s business model. Rather than continuing to focus on leveraging its Forex.com brand, that provides them with lower per-client advertising costs than industry averages, they are moving towards a partner driven model. They aren’t the only broker that is struggling with the high costs of direct sales, as even OANDA, which has probably the smallest percentage of partners is believed to be internally discussing the launch of affiliate programs as its volumes have declined. For GAIN, it would probably lead to cutting more staff, while increasing its biz-dev teams and focusing on being a B2B forex provider.
Summarizing, in our analysis, GAIN is banking on the ability to grab GFT’s partners, and will be expected to be ‘gutting out’ much of the rest of GFT and its staff as it aims to deliver $35-45 million in synergies.
Where does FXCM go from here? We reached out to them, with Jaclyn Klein Vice President, Corporate Communications at FXCM answering “We learned of GAIN’s response this morning and are reviewing it. We will be replying in due course.”
In their remarks against FXCM’s hostile bid, GAIN stated:
- The proposal does not properly value GAIN or the synergies in a combination of the companies
- The board believes that GAIN’s stock has been undervalued in the public markets
- The proposal is an opportunistic attempt by FXCM to capitalize on the nearly 40% increase in FXCM’s stock price over the last five months and acquire GAIN at a below market premium while GAIN is trading near its all-time lows
- GAIN’s first quarter results and the highly strategic and synergistic acquisition of GFT demonstrate the value that the Board believes can be created through the execution of the company’s strategic plan
They interesting comment was that they also stated “At no point in 2013 prior to the public declaration of FXCM’s proposal to acquire GAIN did FXCM or its advisors contact GAIN to indicate their interest in a merger or acquisition transaction between FXCM and GAIN”. The statement may imply that they were in discussion prior to 2012.
We reached to GAIN Capital for further information and at publishing time are yet to receive a response but will update as more information flows.
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