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FXCM Offers to Acquire Gain Capital for $210.4 million

FXCM, one of the worlds’ largest providers of forex and CFD trading services, last night proposed to merge with GAIN Capital, the online trading services provider, and to acquire the company for $210,400,000. 
The bid, stipulated in a letter from FXCM to Gain's Board of Directors, envisages FXCM to pay $5.35 per share of Gain common stock, which represents a 25% premium to the closing price of the shares on April 8, 2013. FXCM also states its intention to pay as much as $50 million in cash in lieu of FXCM shares.
The crucial deal is set to result in the formation of an FX leader, with total client assets of approximately $1.6 billion.
 
The deal proposal comes after two feverish years of acquisition deals for both FXCM and GAIN Capital. 
In June 2012, FXCM acquired a 50% stake in Lucid Markets, a non-bank electronic market maker for about $176 million. In October 2011, FXCM Japan finalized a $17-million deal for the acquisition of Japanese broker Foreland Forex, and in March 2011, FXCM sealed a Memorandum of Understanding to acquire the retail FX business of GCI Capital of Japan.
Gain Capital was also pretty active in the sphere of mergers and acquisitions. In April 2011, it took control of dbFX, the retail FX arm of Deutsche Bank. In June 2012, the company acquired Open E Cry, LLC ("OEC"), an online futures broker, from optionsXpress Holdings, Inc.
 
 

Below is the official press release of the proposed deal:

 
“NEW YORK-- FXCM Inc. ("FXCM") (NYSE: FXCM), a leading online provider of foreign exchange, or FX, trading and related services, today announced it is proposing to merge with and acquire Gain Capital Holdings LLC ("GAIN") (NYSE: GCAP).
 
The proposal was communicated this evening in a letter from FXCM to Gain's Board of Directors, to inform them of FXCM's desire to reach agreement on a transaction that would create the industry leader in online FX trading.
 
"FXCM believes that the substantial potential operating and capital synergies between the two companies would result in an accretive deal with a strong growth profile and improved economies of scale," said Drew Niv, CEO of FXCM. "Additionally, FXCM believes customers of both FXCM and Gain will greatly benefit from the expected improvement of financial strength and stability of the combined entity."
 
"This proposed merger is the highest priority for FXCM, and we hope that Gain is as excited as we are about the potential a combined company could have."
 
The proposed transaction would give Gain shareholders 0.3996 shares of FXCM Class A common stock for each share of Gain common stock. Based on FXCM's closing price of $13.39 on Monday, April 8, 2013, this results in an offer price of $5.35 per share of Gain common stock, which in aggregate would represent $210.4 million in total value. This price represents a 25% premium to Gain's closing share price on April 8, 2013. FXCM is also prepared to offer up to $50 million in cash consideration in lieu of FXCM shares.
 
Conference Call
 
FXCM will host a conference call to discuss the proposed business combination at 8:15 a.m. (EST) tomorrow. This conference call will be available to domestic participants by dialing 877.303.9132 and 408.337.0136 for international participants. The conference ID number is 34133919.
A live, audio webcast, a copy of FXCM's presentation and replay of this conference call will also be available at http://ir.fxcm.com/.
 
 
The full text of the letter issued by FXCM to Gain's Board of Directors follows:
 
April 8, 2013
 
Dear Members of the Board:
 
I am writing to you, on behalf of the Board of Directors of FXCM Inc. ("FXCM"), to make a proposal for a merger with GAIN Capital Holdings, Inc. ("GAIN"). Under our proposal, we would be prepared to offer 0.3996 shares of FXCM Class A common stock for each share of GAIN common stock (the "Proposal"). Based on FXCM's closing price as of April 8, 2013 of $13.39, our Proposal represents an offer price of $5.35 per GAIN share, which in aggregate would represent $210.4 million in total value(1). Our Proposal would entitle GAIN's shareholders to approximately 15.7 million shares of FXCM Class A common stock, or a 16.2% ownership interest in the combined company. Depending on the preferences of your shareholders and their potential desire for immediate liquidity, we would be prepared to include consideration of $50 million of cash in lieu of stock. Our Proposal is not subject to any financing contingency.
 
Our Proposal represents a 25% premium to GAIN's closing stock price of $4.27 as of April 8, 2013(1), and exceeds GAIN's 52-week high(2) of $5.31 on April 27, 2012. We believe that, based on various financial and operating metrics outlined in more detail in the attached slide presentation (the "Presentation"), the Proposal represents an attractive value proposition for your shareholders. Moreover, we believe the substantial operating synergies, capital efficiencies, expanded operating scale, and improved trading characteristics of the combined company present a compelling rationale for this transaction and an attractive opportunity for potential future appreciation in value for GAIN shareholders.
 
Substantial Operating Synergies: As outlined on slide 11 of the Presentation, we believe our overlap of products, target markets, and regulatory requirements create a unique opportunity to potentially realize material synergies through a merger. The regulatory requirements of maintaining a presence in the world's major FX markets create high fixed costs for brokers — by combining businesses, these fixed costs can be leveraged over a larger revenue base. We estimate that when integration is complete, synergies could potentially drive in excess of $50 million in incremental run-rate EBITDA per year.
 
Capital Efficiencies: We believe the combined entity could also potentially realize significant balance sheet and regulatory capital efficiencies. As outlined on slide 12 of the Presentation, we believe that a significant amount of GAIN's cash currently restricted as regulatory capital and designated as collateral for trading partners could be freed up and deployed to further enhance shareholder value.
 
Operating Scale: It is our strong view that scale is critical to success in financial services and especially so in the global FX business, where fixed costs and capital requirements are high and increase with every regulated jurisdiction in which a firm has a presence. We believe that brokers with operating scale enjoy consistently higher margins, lower costs with trading partners and higher returns on equity. Slide 25 of the Presentation illustrates this in a comparison of key metrics of comparable firms including our own.
 
As illustrated in the Presentation, we believe that the combined company would enjoy several enhanced attributes of our business model, and that GAIN's shareholders would benefit significantly by participating in the combined company. In particular, we believe that:
 
Increased, operating scale enables us to maintain / grow trading volume and deliver more consistent results despite significant drops in volatility; and
International diversity has helped us mitigate the impact of changes in local regulations of any one particular key market, and that diversity plus our agency model mitigates exposure to potential adverse regulatory changes in the US market in particular
Attractive Trading Characteristics: We believe our Proposal offers GAIN shareholders the opportunity to hold shares with improved trading characteristics, including greater liquidity, more extensive research coverage, fewer institutional investor limitations, and better correlation with the positive performance of the business. With wider research analyst coverage, average daily dollar trading volume over 8x the average volume of GAIN, and a broader institutional investor base, we believe our proposed exchange of FXCM shares for GAIN shares provides GAIN shareholders with an immediate tangible benefit.
 
In summary, we believe our Proposal presents GAIN's shareholders with the opportunity to exchange their GAIN shares for a share in a combined business with significant potential for upside from synergies and scale economics; multiple capital efficiencies; better protection against market and regulatory challenges; and potential for expanded liquidity to realize value in this transaction or at points in the future.
 
We have engaged Barclays and Financial Technology Partners as our financial advisors and Simpson Thacher & Bartlett LLP as legal counsel. We have completed an extensive, thorough analysis of GAIN's publicly available information. We do not believe that there are significant regulatory or other impediments to the consummation of the proposed transaction. Our Proposal is subject to the negotiation of a definitive merger agreement. Given our high level of familiarity with the retail FX space and GAIN, we would need only to conduct limited confirmatory due diligence and we are prepared to devote a cross-functional team of senior managers to this important project.
 
We believe that a merger of our two companies would create an industry-leader, allowing our shareholders to be part of a larger, stronger organization. This merger is the highest priority for FXCM and has the unanimous support of our Board of Directors and management team.
 
We aim to work together with you and the rest of GAIN's Board to work through the details of our Proposal. We want to ensure that all of our shareholders are aware of the opportunity to participate in the combined company and are therefore publicly releasing the contents of this letter.
 
My team and I are available to meet with you, your management team and your Board as soon as practicable to discuss the terms and merits of our Proposal.
 
We look forward to hearing from you soon and working with the GAIN team to advance the best interests of our respective companies and hope that you will be as excited as we are about the benefits of this proposed combination.
 
(1) Assumes 39.3 million total GAIN shares outstanding, including 35.5 million basic shares outstanding, 2.2 million shares of restricted stock and 1.6 million shares due to exercisable options. Also assumes 81.6 million fully diluted FXCM shares outstanding.
(2) Based on historical closing prices.
 
Yours truly,
 
Drew Niv”.
TAGS: fxcm  gain capital  forex.com  forex trading  forex brokers  acquisition  merger  conference call  cash  shares 

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