Gain rejects FXCM, buys GFT for $107 million

After a turbulent few weeks for the retail foreign exchange industry, Gain Capital has rejected a takeover bid from rival FXCM and instead opted to buy GFT for $107.8 million.

Gain’s purchase of GFT, announced on April 25, will be made with $40 million in cash, a five-year $40 million seller note and the issuance of about 4.9 million shares of Gain common stock, with $80 million of GFT cash at closing. Both companies will retain their separate brand identities.

FXCM, which made an unsolicited stock offer of $195 million for Gain on April 8, has withdrawn its offer, citing the GFT purchase as a deciding factor.

“The cash consumed in the acquisition of GFT fundamentally impacts the balance sheet and capital synergies that were an important driver behind our proposal,” says Drew Niv, chief executive of FXCM in New York.

Glenn Stevens, chief executive at Gain Capital in New York, says FXCM’s bid was considered opportunistic, and undervalued Gain’s stock. When the FXCM proposal was announced, he says, Gain and GFT were more than 90% of the way towards concluding negotiations, which had begun in December last year when Gain acquired GFT’s US business.

It wasn’t as if we were a desperate person standing around looking for a date

“FXCM decided on the path it did to engage in the discussion. It wasn’t as if we were a desperate person standing around looking for a date. We’ve been active in trying to build the business, we went down the road towards the GFT deal and took into consideration the FXCM bid. But we believe the GFT purchase delivers a lot more upside for our shareholders,” says Stevens.

Gain’s share price jumped 4.27% on opening trade on April 25 to a high of $5.86, before falling 7.16% to end the day at $5.44. The day’s closing price was 3.20% lower than prior to the announcement.

Not all Gain shareholders are enamored with the new deal. In a letter dated April 17, Springhouse Capital, a minority shareholder in Gain, strongly urged the board to consider FXCM’s proposal and said the purchase of another company was hard to justify in terms of income.

“It seems hard for any reasonable board member to believe a strategy of pursuing acquisitions could possibly generate more value for Gain shareholders than the significant value they could achieve with a sale of the company today,” the letter read.

Defending his decision to purchase GFT, which recorded a loss of $32.7 million in 2012 and registered a $2.4 million loss for the first quarter of 2013, Stevens said the company’s standing in the market in a variety of business areas was a key consideration.

“I try to look at the underlying health of a business. More important for me is who is using their technology? What markets are they in? How strong are their partner relationships? What has their volume been looking like? These business metrics have all been pointing in a positive direction,” he says.

Stevens says the deal, which he hopes to conclude by the third quarter, will provide “operating synergies” of $35–45 million in the first year and is expected to be fully accretive in the first full quarter after closing. Gain projects the merger will create a combined revenue run rate of $77 million in earnings before interest, taxes, depreciation and amortisation.

Gary Tilkin, founder and chief executive of GFT in Grand Rapids, Michigan, will hold a 12% equity interest in Gain and will join its board of directors. “Consistent with our history of partnering with respected market leaders, Gain has a strong management team and an excellent reputation in the industry. I am enthusiastic about this opportunity to leverage our combined strengths to unlock significant value for both customers and stockholders,” he says.