More M&A activity in the margin trading sector with the announcement of the acquisition of financial spread betting and CFD broker ETX Capital by Swiss-based Guru Capital from its private equity owners, JRJ Group.
This is the latest in a series of deals in the sector that has seen both brokerages and service providers changing hands. The sale of ETX Capital is the second deal this year involving an established brand and market maker after GAIN Capital (Owner of City Index) was bid for by FC Intl Stone.
ETX Capital can trace its roots back to 1965 when it was involved in bonds and mortgage securities. It became involved in the margin trading space in the early 2000s under the brand TradIndex before rebranding to ETX Capital, which stood for electronic trading and execution. Current ETX Capital owners JRJ Group is a growth-oriented private equity firm that was founded in the wake of the collapse of Lehman Brothers by former Lehman executives Jeremy Isacs and Roger Nagioff both of whom hold seats on the board of another city brokerage Marex Spectron, a business which JRJ Group also own.
Given his long experience in the markets, it’s not surprising to learn that Mr Nagioff has had a hands-on role at ETX where he chaired the risk committee
ETX Capital is of course headed by CFD industry veteran and CEO Philip Adler who took over from another former IG Group executive Arman Tahmassebi. Prospective new owners Guru Capital are recent newcomers founded in Switzerland in 2019. Though managing partners Ryan Nettles and Luca Merolla both have a margin trading background, having served their time at Swiss Quote where they were both directors in the Forex trading division.
There had been an expectation of consolidation and M&A activity within the margin trading and FX broking community, following the introduction of ESMA leverage restrictions and the appearance of so-called commission-free dealing. Though it was expected by many participants that smaller brokerages would be acquired at fire-sale prices by the bigger players, which may been yet be seen in the wake of COVID-19.
What wasn’t so keenly anticipated was the acquisition of larger more established brands
But it has certainly been the theme over the last six months with Morgan Stanley’s purchase of E*trade foremost amongst the deals in the brokerage sector on both side of the Atlantic.
No terms or details of the transaction have been released, though JRJ Group paid £15mln for ETX back in 2009 and were said to be exploring a sale of ETX Capital back in the summer of 2017 see our article with a price tag north of £20 million.
A lot of water has flowed under the bridge since then recent market volatility has boosted the profitability for larger margin trading business many of whom have also seen an uptick in new accounts. Though that has to be offset by the inevitable blow-ups and bad debts that sharp and prolonged market moves bring about.
2017 revenues at ETX were around £32 million if revenues are assumed to have maintained at or around that level and estimate a net profit margin of around 30%, which is roughly a 25% a discount to that enjoyed by market leaders IG, then it is safe to infer a profitability of around £9.50 to £10 million.
A buyer might pay a multiple thereof if they believed the momentum in trading activity, seen in the industry during the spring, can continue through the balance of 2020 and beyond. Though that is quite a big if. The fact that the shrewd and experienced operators at JRJ are happy to be getting out here leads us to think that may not be the case.