It is beginning to look very unlikely that Gain (Forex.com) will survive as an independent company.
In a very strongly worded letter to Gain's Board of Directors, Springhouse Capital urged that the Gain Board work to maximize value by pursuing a sale of the company -- by shopping it around to other potential buyers, and/or by trying to drag a better offer out of FXCM.
Springhouse Capital is a private hedge fund, run by value investor Brian Gaines. Springhouse owns about 2% of Gain Capital stock, a position it has held from soon after Gain's IPO in late 2010 until today -- meaning that Springhouse has suffered a large loss on its investment in Gain.
The full contents of the Springhouse letter can be seen below, but first we'll summarize some of the very strongly worded points they make -- including a veiled threat to take legal action against the Board "in the event the Board elects to reject FXCM's proposal and any other strategic interest".
It seems as though Springhouse is not enamored with Gain's decision to fight FXCM using a 'poison pill defense', such as the Shareholder Rights Plan announced by Gain Capital soon after FXCM's offer was made earlier this month.
Springhouse made four basic recommendations in its letter (full text below):
Among Springhouse's zingers included:
As we wrote last week when explaining why FXCM is trying to buy Gain Capital, this is going to get a lot more interesting before it is over. Stay tuned to LeapRate as this unfolds...
Springhouse Capital Delivers Letter to the Board of Directors of Gain Capital Holdings, Inc.
Request for Board to Conduct Strategic Alternatives and Form Special Committee
New York, April 24, 2013 (GLOBE NEWSWIRE) -- Springhouse Capital announced today that it has sent a letter dated April 17, 2013 to the Board of Directors of Gain Capital Holdings, Inc. The full text of the letter follows:
April 17, 2013
Board of Directors, Gain Capital Holdings, Inc., Bedminster One, 135 Route 202/206, Bedminster, NJ 07921
Attention: Peter C. Quick, Glenn H. Stevens, Christopher W. Calhoun, Susanne D. Lyons, Joseph Arthur Schenk, Thomas A. Bevilacqua, Mark E. Galant, Christopher S. Sugden
To the Board of Directors ("Board") of Gain Capital Holdings, Inc. ("Gain" or "the Company"):
Springhouse Capital owns approximately 2% of Gain and it has been a shareholder of the Company since shortly after the IPO.
I am writing to request that the Board take the following actions in response to the recent acquisition overture from FXCM Inc. ("FXCM"). First, I urge the Board to aggressively pursue strategic alternatives in order to identify and evaluate interest from other potential acquirers. Second, I urge the Board to form a special committee to handle the strategic alternative process. Third, I urge the special committee to negotiate with FXCM or any other buyer to generate maximum value for Gain shareholders. Finally, I urge the Board to suspend any plans for acquisitions until the strategic process has concluded.
Gain currently faces two alternatives: aggressively pursue the best value possible for shareholders through a sale of the Company or maintain its independence and engage in an inorganic growth strategy. Due to the large synergies a deal offers versus the difficulty and cost of effectively executing a growth strategy as well as the low likelihood of the market assigning a reasonable multiple on Gain's volatile earnings stream, I believe a sale of the Company is the only way to maximize shareholder value.
Gain reported EBITDA of approximately $10mm in 2012. By all accounts, 2012 was a poor year for Gain due to low currency volatility and low trading volumes. Even if the trading environment were to turn favorable and EBITDA bounced back to $30mm, applying FXCM's forward trading multiple of 5.5x to that $30mm would yield a stock price of approximately $5 per Gain share. There is no certainty the Company will achieve that level of EBITDA and its results have been far more volatile than FXCM so it is not clear that the market will afford it FXCM's multiple. In fact, Gain's recent financial performance has consistently fallen short of expectations and the market has little faith in any consistency of earnings.
In order to create value beyond $5 per share, Gain would likely have to make acquisitions. Any such acquisitions would come at a significant cost, carry integration risk, and take a significant amount of time. It seems hard for any reasonable Board member to believe that 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. As a result, it is clear that the Board should fully evaluate strategic alternatives to identify the best potential suitor. I believe that any analysis of FXCM's offer (or any other offer) by the Board must, at a minimum, include a detailed justification of how a Gain growth strategy could possibly achieve more value than a sale of the Company to avoid violating their fiduciary responsibility.
In order to evaluate strategic alternatives in the most effective and objective manner, I strongly believe the Board should form a special committee. My primary concern is that the high level of executive compensation for the CEO, which at $2mm is roughly double that of FXCM's CEO who manages a company with three times the trading volume and client assets, could create an incentive to continue as a standalone company. I therefore believe a special committee should be formed to ensure an objective evaluation of any offers and it should consist only of outside directors.
As a Gain shareholder, it seems clear that FXCM can pay far more than the current implied price of $5.35 per share of Gain and I urge the Board to claim a more appropriate share of the transaction synergies for Gain shareholders. In FXCM's transaction presentation, they highlight $50 to $70mm of incremental EBITDA from Gain including the targeted synergies and a release of $80 to $100mm in capital from the combined business. At the initial proposed transaction price, FXCM would effectively be paying less than two times EBITDA for Gain based on these assumptions. FXCM's pro forma EBITDA assumptions are based on Gain's depressed 2012 operating results plus synergies to be unlocked in the transaction. Using FXCM's trailing EBITDA multiple applied to the incremental EBITDA from Gain created in the deal would yield a value of $12.30 per Gain share. It is easy to conclude that FXCM offered a low initial price, yet there are such extraordinary synergies from this transaction that there should be plenty of negotiating room for Gain's Board to claim a larger portion of the synergies for Gain shareholders and still generate ample value for shareholders of both entities.
Finally, it is no secret that scale is very important in the brokerage business. Gain itself has acquired a handful of companies since its IPO in an attempt to gain scale. As noted above, I believe it will be nearly impossible for Gain to replicate the kind of scale through its own acquisitions that is available in the FXCM deal. But at the very least, I ask that the Board suspend any potential acquisitions by Gain until the strategic alternatives process has been completed.
I am hopeful that the Board will embrace these recommendations and commence a thorough process to evaluate the future of Gain. In the event the Board elects to reject FXCM's proposal and any other strategic interest, Springhouse Capital would review all legal remedies to ensure that the Board is meeting its fiduciary responsibilities to shareholders.
Managing Member of Springhouse Capital
Brian Gaines or Jeff Graf