The surprise deal between Playtech and CFH Group is sure to be one of the main topics of discussion at the Finance Magnates London Summit in 2016, which is to start later today at The Brewery on Chiswell Street in Central London. The decision by Playtech to purchase CFH Group for $120 million surprised the industry and is sure to cause a stir in the business-to-business segment of the market.
The deal comprises an initial payment of $43.4 million (€39.8 million), 70% of CFH’s fully diluted share capital, representing a multiple of approximately 7x the current EBITDA run rate; and an additional consideration for the remaining 30% of CFH which will be subject to a put and call option which can be exercised in 2019 at a multiple of 6.0x CFH’s adjusted EBITDA for the year ending 31 December 2018, capped at $120 million less the initial consideration ($76.6 million) for the 30%.
CFH’s management will remain with the business following completion and will retain the remaining 30% of CFH which is subject to the aforementioned put and call option. Completion of the acquisition, which is subject to the satisfaction of certain conditions, is expected to take place on 30 November 2016. The acquisition is immediately earnings accretive for Playtech.
Finance Magnates spoke exclusively with the CEO of Playtech’s financial division Ron Hoffman and the CEO and founder of CFH Group Christian Frahm about the hottest acquisition of the season.
Up until now Playtech has been focused on B2C, why did you guys decide to venture into B2B?
Ron Hoffman: We always saw significant growth potential through expansion into B2B. We are a division of Playtech, which is the world’s leading B2B provider to the gaming industry, meaning we come from a B2B mindset. We have always believed there is a big opportunity to establish ourselves in the same way as Playtech within the financial trading arena where we can leverage our technological superiority and core competencies. We believe CFH is already well positioned as a reputable B2B provider and the best entry point into the growing B2B arena.
Why enter the liquidity provision market, and not for instance pure technology by acquiring a tech provider?
R.H.: We have the best of both worlds as CFH is both. It’s a leading well respected liquidity provider with liquidity arrangements with tier 1 banks and prime brokers, driven by its proprietary clearing platform which enables its customers to enjoy the most competitive prices available, liquidity control and customization capabilities, and extremely fast execution. This is further strengthened by CFH’s suite of technology tools tailored for retail brokers, which includes real time risk management tools and cloud based back office tools.
Christian Frahm: CFH is the best entry point into B2B given its technology and most importantly its access to hundreds of online CFD brokers generating over 1 trillion in volume. When combined with the technology, product and markets expertise there is a real and significant opportunity to provide an extended offering that includes both technology and trading and we see real and significant revenue synergies.
What are the plans for CFH going forward? Any changes its clients should expect?
C.F. and R.H.: We see significant value to CFH customers from this transaction. First, given PT’s scale and financial strength, CFH will be able to provide its customers with improved trading terms through more attractive margins and other means, as well as access to a deeper pool of liquidity through the addition of intra group liquidity arrangements, enabling more competitive prices and faster execution. Secondly, CFH will be able to offer a wider range of CFD instruments on its clearing system, with Playtech’s Financials division currently offering over 2,000 instruments. Lastly, CFH will benefit from Playtech’s leading technological superiority to further develop its offering, and will further benefit from being able to offer proprietary retail trading platform and CRM technology to CFH customers.
Could you elaborate further on the deal’s financials?
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R.H. and C.F: The deal structure is very much aligned to creating value for both the management sellers and Playtech. Playtech will pay a consideration of up to $120 million, with an initial consideration of approximately $43 million for 70%, representing a multiple of less than 7.5 times the current EBITDA run rate. The remaining 30% is expected to be acquired at six times CFH’s 2018 EBITDA, with a overall cap of $120 million. This reflects an attractive and accretive transaction for Playtech and a significant upside for seller as the business enjoys future growth. A win win deal!
How will CFH be integrated with the existing business of Safecap and overall Playtech financial unit strategy?
R.H. and C.F: We will have a clear separation between B2C and B2B. With that being said, as I indicated before, there are significant opportunities in offering our unique retail trading platform and CRM systems to B2B customers, as well as expanding CFH product offering with further instruments and a deeper liquidity pool, which will mean better commercial terms for their customers.
Does Playtech have any other acquisition plans?
R.H.: Playtech has always been an acquisitive company and we are constantly evaluating M&A opportunities and believe there are significant opportunities going forward, definitely after this transaction which we believe is a platform for further ones to come. We are truly excited about the future.
Was approval from the FCA difficult to receive in light of the AvaTrade/Plus500 deals? What has made the FCA change its views?
R.H. and C.F: No. We have worked closely with the FCA and are delighted to receive its endorsement. These were very different transactions and totally different circumstances. Remember that the historic contemplated deals were highly opportunistic and on the back of significant regulatory issues identified with the target, while we were new entrants to the industry at the time. CFH has a completely different history with its regulator and this will continue going forward. We have come a long way in the last year.
Are you looking to create a game changer in the online trading market?
R.H. and C.F: Yes. We believe this industry is in its infancy and there are a lot of growth opportunities out there. We aim to become a significant player in the space in the same way we managed to do in the gaming industry throughout the years. We have the core competencies, the technological superiority, the resources and the drive.
Are you concerned with the ongoing negative media attention regarding the trading market, especially CFDs in Western Europe and binary options in general?
R.H. and C.F: We are constantly monitoring the regulatory developments in the space. We embrace regulatory processes and environments. As indicated in the past, we believe tighter regulations will benefit the industry over time and the responsible and compliant brokers will enjoy higher market share, better quality of earnings, and higher profitability. We are not a player in the binary options space and believe it is significantly challenged from a regulatory perspective and do not see ourselves going that direction.
How do you foresee the multi-asset trading industry developing over the next three years?
R.H. and C.F: We believe we will see continued organic growth in the space altogether as seen in the last few years. We also believe the current market is quite fragmented and we believe we will start seeing further consolidation in the space, both on the back of regulatory developments, where the smaller players will have more challenges to operate, and on the back of consolidation opportunities. And lastly, we believe we will see further technological developments that will further benefit brokers in the space and enable them to grow their business more effectively and responsibly, as well as providing regulators better visibility and the ability to better monitor their activity and operations.