FXCM conducted a strange maneuver as they issued their Q1 2015 Financial Report after the close of trading on Friday. With the markets closed for the weekend, such timing is often reserved for firms aiming to mute initial trader reaction to their news. With FXCM providing more details on their Swiss franc related losses, it can be assumed that the broker purposely chose the Friday after the close period in contrast to their typical Thursday after the close slot that has been used for recent earnings reports.
Following our initial coverage of FXCM’s $393 million dollar loss and April trading metrics, today we take a deeper look at some of the trends and details provided by FXCM. Further information is expected to become available on Monday with their conference call.
RPM – Prior to FXCM suffering losses due to the Swiss franc volatility caused by the Swiss National Bank (SNB), the stock had been lagging due to declining retail revenue per million (RPM). At the heart of the matter was the fact that FXCM had announced that they had decreased commissions at many of their jurisdictions. As a result, RPM was expected to decline, but would be mitigated by an expectation of rising volumes. While retail volumes did indeed rise for FXCM customers, at $69 in Q4, RPM was below the broker’s initial forecast of $70 – $75.
In Q1, FXCM reported RPM declining again. The broker provided two figures; $67 and $60. The $67 figure excludes the broker’s discontinued operations, of which they have sold FXCM Japan and are in the final stages of selling FXCM Hong Kong. Including the two units, and what is an apples to apples comparison with Q4’s figures, RPM was shown to have declined to $60. That is a considerable drop, and relates that despite the broker announcing that rising volatility had triggered strong volumes traded, a large percentage of trading is coming from less profitable customers. As such, volume increases from higher commission traders aren’t as leveraged to volatility as they are from low spread customers.
For FXCM to raise its RPM it needs to count on increasing the percentage of volumes for higher fee CFDs, increasing accounts in jurisdictions with wider spreads, and or migrating customers to their newly reintroduced dealing desk model. Looking ahead, RPM is expected to be the ‘canary in the coal mine’ for FXCM and if it doesn’t meaningfully improve it would reveal that they are having problems onboarding customers to accounts with higher profit margins.
Japan and Hong Kong Breakdown – FXCM stated that revenues from discontinued retail operations were $3 million in Q1 2015. The figure is nearly all composed from FXCM Japan and Hong Kong which had total volumes of $157 billion for Q1. As such, RPM from these units calculated to roughly $20.
Asset Sales – While we know that FXCM received $42.2 million net of cash for its Japanese unit which calculated to a valuation of about 7X EBITDA, the broker also related that its FXCM Hong Kong and FXCM Securities UK are in in the late stages of being sold. The two units combined for $3 million in EBITDA during 2014 with $2.5 reported for FXCM Hong Kong. It can be assumed that FXCM Hong Kong will garner a higher valuation than the Japanese unit due to it having a strong position in the hot Chinese market. Therefore, it won’t be surprising if an aggressive buyer emerges and FXCM nets well above 10X EBITDA for the Hong Kong. However, the lack of meaningful revenue in Q1 and a discounted RPM could keep buyers from being too aggressive. (Update: In the broker’s conference call, CEO Drew Niv clarified that FXCM expects to continue to hold onto its Chinese business as the majority of that business is onboarded through their UK entity, with the HK one serving primarily Hong Kong based clients.)
Elsewhere, FXCM indicated that its sale of its 35% stake in FastMatch and 50.1% holding in Lucid and V3 was underway. In Q1 2015, Lucid, V3 and Faros Trading accounted for $23.3 million in revenues compared to $20.6 million in Q1 2014. As such, for FXCM the units are growing businesses that on the one hand should find interest from buyers, but on the other hand will limit the broker’s profit growth in the future.
Leucadia Debt – The bottom line for FXCM is that it is in a race to repay its $300 emergency loan it received from Leucadia Financial following $265 million in customer negative balances it absorbed from the Swiss franc volatility. According to FXCM, they have paid back $81.6 million on the loan, with outstanding principal to Leucadia of $228.4 million. The three year loan comes with yields starting at 10% and rising near 20% which has forced FXCM to sell non-core assets to both cover interest payments as well as provide the broker with breathing room to become cash flow positive.
Potential asset sale valuations net cash (FortuneZ estimates)
FXCM Hong Kong – $25-$30 million
FXCM Securities – $2-$3 million
Lucid (50.1% stake) – $140-$200 million
V3 (50.1% stake) – $20-$30 million
FastMatch (35% stake) – $20-$40 million
Total $207-$303 million (not including potential tax payments on investment profits)
Using the valuations above, FXCM would appear able to pay the bulk of its remaining debt with Leucadia. However, with each quarter meaning another outsized debt payment is owed, FXCM benefits from closing deals earlier than later to ensure cash from sales are used toward principal and not interest.
Remaining broker – To understand what FXCM will be after it emerges from finalizing its asset sales, it is important to review the terms of their loan. More than a loan, the funds from Leucadia can be viewed as an investment. The terms are as follows; Leucadia receives:
100% of principal plus interest
50% of the next $350 million from asset sales
90% of the next $500-$680 million from asset sales (exact figure is variable and depends on how much of the loan had been paid back by April 16th 2016.
As such, even were FXCM to be completely sold today for $1.2 billion, Leucadia would walk away with at least $853.4 million ($228.4M + $175M + $450M).
For FXCM, even upon repaying the loan portion of the investment, Leucadia is well positioned to continue benefiting with the firm also having a provision to force a complete sale beginning in January 2018. The present result is that FXCM is reestablishing itself as a retail focused forex and CFD broker in the non-China and Japan markets.
Valuation – As for a price of what FXCM would fetch on the open market, comparable deals for legacy brokers have been around 4-6X EBITDA. In 2014, FXCM reported EBITDA of $107 million. Excluding $40 million attributed from discontinued operations, the figure was $67. Using a mid-value of 5X EBITDA, it calculates to sale price of the remaining FXCM at around $335 million net of its existing cash holdings. Adding their existing cash holding of $329 million provides a potential acquisition price of $664 million.
Based on Leucadia’s investment terms, from a $664 million sale, shareholders would be entitled to $206.4 million (50% of $350M and 10% of remaining $314M).
But, the shareholder figure is a bit mysterious as public owners of the stock only comprise about 54% of the broker’s ownership, with the remainder controlled by insiders as part of FXCM Holdings. Therefore, public shareholders would receive around $111 million using the valuation above, which calculates closely to FXCM’s current value of $2 a share.