INTL FCStone's $236m acquisition of GAIN Capital

The US-based broker and clearing house, StoneX has completed its all-cash $236m acquisition of GAIN Capital. StoneX first revealed its intention to acquire GAIN Capital in late February after receiving approval from the board of both companies. Initially, many GAIN Capital shareholders opposed the deal. However, in the end, the deal went through with a 71% shareholder approval.

"By joining INTL, we see an incredible opportunity to leverage their capabilities and ecosystem of products, and to deliver an even more comprehensive offering to our customers. Bringing together GAIN’s expertise in serving the retail customer and INTL’s unparalleled access to the financial markets creates an exciting value proposition and enables the combined group to serve a wider range of customers.” – Glenn Stevens, GAIN CEO

Who?

Acquirer: StoneX (formerly known as INTL FCStone)

StoneX is an institutional-grade financial services network that connects its clients with the global markets across various asset classes - providing execution, post-trade settlement, and clearing. Clients use its unique blend of digital platforms, market intelligence and high-touch service to manage their market risk, pursue trading opportunities, make investments efficiently, and improve their business performance.

Target: GAIN Capital

GAIN Capital Holdings (publicly listed as GCAP) provides innovative trading technology and execution services to retail and institutional investors, with multiple access points to global exchanges and OTC markets across a wide range of asset classes such as global equities, foreign exchange, and commodities. GAIN Capital has an international presence across North America, Europe and the Asia Pacific regions.

The Deal

Value: $236m (all-cash consideration)

Announced: 27 February 2020

Closed: 31 July 2020

Financial Advisors to GAIN Capital: GCA

Financial Advisors to StoneX: Jefferies

Financing: Jefferies also provided $350m of committed debt financing for the acquisition

StoneX's Acquisition Criteria:

Source: StoneX

Why?

Strategic Rationale:

For Stonex, it is expected that the integration of GAIN's businesses will drive transaction volumes and create new cross-selling opportunities across all platforms - "ultimately driving our financial performance in the process”. This is because acquiring GAIN Capital introduces a new business segment (retail trading), which is expected to increase net operating revenue by almost 30%, as well as increase StoneX’s customer balances by $929m, to an estimated $4bn. Similarly, GAIN Capital also deepens and broadens StoneX's platform across both customer and product offerings.

For GAIN Capital, the combination naturally addresses the key challenges of GCAP's performance as a standalone public company – insufficient scale and significant quarterly volatility. This is because the combined revenue volatility would be 56% lower than GCAP as a standalone company and 26% lower than StoneX standalone, as the two businesses are uncorrelated. As such, the consolidation absorbs GCAP's businesses into a larger, more diversified company with an international footprint and scaled support functions.

The acquisition also aligns well with StoneX's long-term strategy. Leveraging GCAP's technological assets, expertise and platform (e.g. mobile trading, automated account opening), as well as its marketing know-how, will contribute significantly to accelerating the "digitization" of StoneX's institutional platform. Furthermore, it facilitates expansion into various client segments and geographies where cost-effective and compelling “on-ramps” exist or can be built. Linked to this, the addition of StoneX's capabilities and products to GAIN Capital's retail client base is expected to enhance "the profitability and longevity of each relationship" and make StoneX's platform "more enticing to new clients versus the competition". Overall, put simply, the combined group will: 1) improve client satisfaction and retention 2) enable cross-selling across all platforms and 3) Make client acquisition more targeted, efficient and successful.

Synergies:

The transaction also presents visible and financially attractive synergies, which are expected to enhance margins, EPS and return on equity. This is partly because transaction flow margins are expected to improve, and by combining the transactional flows, it can "increase revenue capture by internally crossing more spreads and getting better execution from markets".

More specifically, StoneX anticipates $32m in fully phased cost synergies and $100m in capital synergies, which expected to be realised within 12 months. This would enable rapid deleveraging while maintaining a strong capital and liquidity profile. It is also expected that the combination will be at least 30% accretive in year 2. It is worth noting, however, that the restructuring costs to deliver these synergies are expected to amount to $6m.

“By leveraging INTL FCStone’s products and services, we can enhance GAIN’s product offering to drive market share growth by capturing additional business from existing clients, as well as enable the acquisition of new clients. In addition, as a result of the elimination of GAIN’s public company costs and the consolidation of our two infrastructures, we expect to enhance our earning power" – CEO of INTL FCStone Sean O’Connor

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Click here to access StoneX's investor presentation, which provides additional insight on the deal's rationale.