FXCM 10-Q confirms Faros Trading sale done for nothing upfront plus %-of-profits – but why?


It has not been an easy week-and-a-half for FXCM Inc (NYSE:FXCM). Since reporting Q1 results and April volume metrics, FXCM shares have traded down seven days in a row to set a new all time low.

Digging deeper in FXCM’s Q1 report, we found some interesting stuff.

As we reported at the beginning of April based on disclosures made by Leucadia National Corp. (NYSE:LUK), FXCM’s previously announced sale of institutional FX arm Faros Trading to Jefferies LLC was done for no money upfront – just for receiving back a percentage of future Faros profits.

FXCM’s 10-Q for the first quarter of 2015 states: ‘Consideration will be determined quarterly pursuant to an earn-out formula based [on] Faros’ results beginning on the closing date and ending on November 30, 2017. Any consideration received will be divided among the Company and the non-controlling members of Faros based on a formula in the sales agreement.’

So the question remains: Why would FXCM give away its share of Faros – which it had bought in 2013 for $15.6 million – just getting back a percentage of future profits? They already owned 100% of the profits. Now, in return for nothing upfront, they’ll be getting just some fraction of future profits.

An argument could be made that Faros might fare better under Jefferies’ ownership and generate more profit than if it remained at FXCM, making this a win-win for both FXCM and Jefferies. But still, unless Faros was losing lots of money why just give it away? (And based on FXCM’s 2014 10-K report, it appears as if Faros was operating at about breakeven).

The answer probably lies with who the buyer is – investment bank Jefferies LLC, which is owned by Leucadia – the same firm which loaned FXCM $300 million to keep it afloat after the January 15 Swiss Franc spike.

From where we stand, it certainly looks as if the sale of Faros was not a pure arms-length transaction. Was it just a coincidence that Jefferies was the best buyer for Faros? Was no other arm’s length entity willing to pay at least something upfront for Faros?

Unless there’s a really good explanation, it certainly looks like the folks at Leucadia are now calling the shots at FXCM, and doing so to their own benefit.

We would remind LeapRate readers that this isn’t the only time Jefferies has benefited big-time from the Leucadia-FXCM link. As was exclusively reported at LeapRate, Jefferies earned a $21 million (!!) advisory fee from the Leucadia loan made to FXCM. Even if Jefferies had connected and helped negotiate between the parties, that is a very hefty fee for arranging a loan over the course of just a few days. Were Jefferies not owned by Leucadia, would they have earned such a large (or any) fee from that deal? And again, that money comes out of FXCM’s pocket. FXCM received just $279 million from Leucadia (with $21 million withheld for Jefferies’ fee), while it has to pay back the full $300 million plus interest to Leucadia.

To be fair to FXCM, the company does seem to be doing well operationally. Their trading volumes of more than $300 billion retail and $200 billion institutional leave them in a very strong a competitive position. And they believe that they are on target to repay most or all of the Leucadia loan by the end of 2015.

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FXCM 10-Q confirms Faros Trading sale done for nothing upfront plus %-of-profits - but why?

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