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FXall files for an IPO

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Estimated Valuation for FXall of $400 million

Institutional Forex ECN FXall (or more formally, FX Alliance Inc.) filed yesterday for an IPO and a public listing of its common shares. FXall bills itself as "the leading independent global provider of electronic foreign exchange trading solutions, with over 1,000 institutional clients worldwide."

This is obviously quite an interesting time to be filing for a public offering, when most IPO activity has been halted due to a very volatile (and mostly negative) equity capital market, especially involving financial-related stocks. Also, FXall has not exactly been "hitting the cover off the ball" – although its first half 2011 revenues of $57.0 million were 19% above last year, net income decreased slightly to $5.8 million. However, FXall seems to be getting in line to go public either later this year or early next, when conditions allow.

Although the company did not list a specific transaction size or valuation, based on a review of the prospectus we estimate that:

  1. Offering Size – is planned to be in the range of $75-100 million, based on the company's filing fee.
  2. Company Valuation – is targeted to be in the $400 million range, pre-IPO, based on the company currently having 28.3 million shares outstanding, and a typical IPO price in the low to mid teens. (Note that both FXCM and Gain Capital filed with $13-$15 price ranges for their IPOs, with FXCM's eventually pricing at $13, and Gain Capital at $9 per share. Both those companies' share prices trade below the original IPO price). As well, an offering size of $100 million would fit a planned valuation of $400 million – IPO'ing shares representing 25% of the company for a company this size is about industry standard.

To achieve that valuation level (if our estimates turn out to be correct), FXall would need to trade at a significant premium to the publicly traded retail FX firms, such as FXCM and Gain Capital in the US, and IG Group in the UK. Based on our calculations, FXCM trades at a P/E ratio of 10-11x, a Revenue multiple of 2x and an EBITDA multiple of 7x. (See LeapRate's Forex Industry Report for more details on FX public and M&A valuations). Those multiples would put FXall more in the $150-200 million valuation category.

It is very possible that FXall's largest shareholder, venture capital firm TCV (see below), will not end up doing very well on its investment. TCV invested $77.5 million for its 28.1% stake in FXall back in 2006. Anything less than a $275 million pre-IPO valuation would mean a likely loss on its investment for TCV.

Other interesting notes from FXall's prospectus include:

  • Lava Trading acquisition from Citi was for $5.1 million – FXall bought Citigroup's competitor in its space, called Lava Trading, in December 2009. The prospectus reveals that the acquisition cost FXall $5.1 million, in cash, consisting of a $7.4 million upfront cash payment by FXall, less a $2.3 million "clawback" paid back to FXall by Citi in June 2011.
  • Volumes – average daily volume of $81 billion in the first half of 2011. That would make make FXall significantly larger than nearest competitor Hotspot FX, which does about $63 billion daily (as reported recently by Forex Magnates).
  • Shareholders – FXall's largest shareholder is venture capital firm Technology Crossover Ventures (or "TCV"), with 28.1%. Next is CEO Phil Weisberg with 6.8% (including near-exercisable options). After TCV and Weisberg, several financial institutions each own 5.1% - this list includes BofA, BNP Paribas, Citigroup, Credit Agricole, Credit Suisse, Goldman Sachs, and HSBC. Not surprisingly, the top three underwriters listed for the IPO are BofA, Goldman Sachs and Citigroup.
  • Most of FXall's business comes from Asset Managers and Corporations hedging commercial FX risk – although it in known mainly in the Forex world as an ECN, FXall receives most (71%) of its fees from "Relationship Trading", which includes collaborative trading and request for stream systems, used primarily by corporations and asset managers to hedge commercial FX risk. "Active trading", which includes continuous streaming prices and ECN systems, used primarily by banks, broker-dealers, hedge funds, prime brokers and other market participants who trade currencies as a central activity or profit center, accounts for the other 29% of fees.

You can download FXall's prospectus (technically, a Form S-1 registration statement) from the SEC's website here.

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Guest Thursday, 17 April 2014

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