IG Group take as a billion-dollar bet on TastyTrade

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IG Group announced its intention to buy TastyTrade a US options brokerage and educational business with operations in Chicago, Australia and shortly Canda, with users around the globe.

IG published interim figures yesterday that covered the first 6-months trading, in the financial year 2021. The numbers reflected the growth in trading volumes and client numbers that have boosted many brokers over the last 12 to 14 months.

And though some analysts and commentators had predicted a slowdown in forex trading activity, the IG results, which were for the 6 months to the end of November 2020 showed little sign of that.

The CFD broker’s revenues rose to £416.90 million, a year over jump of +67%. Whilst pre-tax profits ballooned by +129% to £231.30 million. Showing that not only was IG enjoying volume growth but that is was enjoying an even bigger rate of growth as far as profit margins were concerned.

Core market revenues grew by +62% and revenues from markets and products that IG classifies as significant opportunities came in £76.3. Nearly doubling the £36.30 million generated by these businesses in the first six months of the previous financial year.

However, results were not the only news that spread betting broker IG Group shared with the markets and they surprised and indeed perhaps even shocked some observers with news of a proposed US $1.0 billion acquisition of TastyTrade .

The business which was founded in 2011 and moved into brokerage in 2017 generated pretax profits of $49.40 million in the financial year to the end of December 2020. Those pre-tax profits were earnt on the back of revenues that totalled $116.20 million. TastyTrade has 105,000 active trading accounts and another 900,000 educational users.

The popularity of options trading in the US underwent phenomenal growth in 2020 and many US options exchanges have reported record trading volumes. As a result, there are now thought to be 1.50 million retail options traders in the United States. An addressable market that won’t have escaped the attentions of IGs management and their advisors.

IG Group is being advised on the deal by US investment bankers Jefferies International as well as Barclays and Numis.

Should the deal go ahead the billion-dollar price tag will be made up of a $300.0 million cash payment, with the balance being satisfied through the issue of 61.0 million new IG Group shares.

The management and key shareholders of TastyTrade will join the leadership team at IG once the deal completes, and those shareholders will own approximately 14.1% of the enlarged IG Group. The two largest institutional shareholders in TastyTrade , who will own around 5.7% of IG once the transaction closes, will be subject to the six-month lock-up period during which they won’t be able to sell their IG stock.

The transaction, which will require regulatory approval in the US is expected to close in May 2021.

This will be a transformational deal for IG Group and will give it a far firmer foothold in the US markets, where up until now its has really only had the NADEX derivatives exchange.

A billion dollars is a sum that most other margin trading businesses could really only dream about and very few if any could consider spending on an acquisition.

The deal should allow IG to continue to diversify its revenue stream away from its core CFD and Spread Betting markets. And if TastyTrade can be quickly and profitably integrated into the wider group not only will there be cross-selling opportunities within existing operations there may also be an appetite for further M&A activity on IG’s part.

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