In 2012, Gain Capital made of $3.5 million profit. However, the 2012 earnings were not enough to support the market price. In 2011, the company earned a $15.5 million profit and in 2010 it had a $37.9 million profit. It’s obvious that the economy had a tremendous effect on the company’s bottom line. However, based on the first quarter of 2013 earnings, the company can potentially reach $17 million in GAAP earnings.
Looking at the company’s acquisition, it appears that this is a valuable purchase, even if Gain Capital only obtains half of the synergies it expects from the merger. The purchase price is $107.8 million of which $40 million is in cash, $40 million is in the seller’s note, and 4.9 million is in common stock which has a fair value of $26.9 million. Currently, GFT has $80 million in cash on hand. Once the company’s merge, Gain Capital will have access to that $80 million, which essentially makes the net purchase price $27.8 million.
When it comes to expense synergies, Gain Capital thinks that it will reach $35 million to $45 million in expense synergies. This would be a real $35 million in savings, which would increase the value of the combined businesses substantially. In fact, if you discount 20 percent of the $35 million in savings, the value would be approximately $175 million to Gain Capital.
No matter how you look at this acquisition, the value of the common stock is sure to increase. There will be a serious value enhancement if the optimistic projections turn out to be accurate. If the pessimistic projections turn out to be accurate, the acquisition is still a worthwhile purchase.
Gain Capital’s capital structure was already conservative before the acquisition. After the acquisition, the company’s capital structure will be approximately 20 percent debt and 80 percent equity. It may even be more conservative than that, since the common stock will be revalued upward by the market as the macro environment improves.
Gain Capital’s acquisition of GFT is the latest in a series of acquisitions. As the volatility hit a seven-year low, Gain Capital’s earning power was impaired in 2012. The environment was the driving force for the company to diversify part of the earnings stream to the institutional commission based business. Although this business is low margin, it has a greater stability than retail Forex trading. After the GST acquisition, the company estimates that commissions will make up 22 percent of its revenue, which will be an increase of 13 percent over 2012 and 3 percent over 2011.
In addition, Gain Capital will be able to offer more products after the acquisition. The company already has a solid retail brand and the acquisition will give it a solid institutional brand. Gain Capital’s website states, “GFT has built an extensive network of partners throughout the world that accounted for over 75 percent of GFT’s retail trading volume in 2012. This strong partner business complements GAIN’s market-leading retail brand, FOREX.com, and the combined company will source approximately 52 percent of its retail volume from partners, with the remaining 48 percent coming from direct retail clients. In addition, GFT’s growing Sales Trader business, which accounted for approximately 40 percent of GFT’s total trading volume in 2012, fits well with GAIN’s institutional execution desk, providing a substantial opportunity to expand the Company’s institutional business.”
Gain Capital and GFT have previous experience in working together, since Gain Capital purchased GFT’s US retail business last December. Merging the cultures will be a lot easier as a result.
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