Is FXCM about to restructure its deal with Leucadia?


It was another rough week for FXCM Inc (NYSE:FXCM), with FXCM shares down another 12% – including an 8.6% drop Friday to set a new all-time low ($5.26) and a new all-time low close ($5.30). Note that is equivalent to just 53 cents per share pre-reverse split for FXCM.

FXCM’s market value is just around $35 million right now. That for a company which did nearly $60 million of Revenue last quarter.

After markets closed on Friday, when most Wall Street folks were already on their way to weekend plans, FXCM put out a brief press release pointing out that:

  1. FXCM had recently bought back about $65 million of its own shares, as part of an authorized $130 million program, and
  2. FXCM was negotiating with Leucadia National Corp (NYSE:LUK), which had provided FXCM with a $300 million lifeline loan back in January, to amend some of the terms of that loan.

The interesting part, to us, was part 2 of that announcement. As we’ve written several times before, the main thing holding back FXCM shares right now is the perception among investors that even if things go right at FXCM, most of the ‘upside’ will accrue to Leucadia, not to FXCM shareholders.

To recap briefly, Leucadia’s $300 million loan to effectively allow FXCM to remain open after a huge hit FXCM took in the form of negative client balances from January’s 20%+ spike in the Swiss Franc came with some fairly onerous terms – in the form of punitive interest expense and sale rights. The sale rights give Leucadia the right to force a sale of FXCM or its assets after three years (i.e. in early 2018), and to get the lion’s share of the proceeds from that eventual sale.

Those rights remain in place even were FXCM to repay the loan in full to Leucadia.

So the question which stock market investors have been asking themselves when it comes to FXCM is simply: Why own shares in a company when you won’t get most of the upside even if things go well?

With FXCM actually doing (operationally) a lot better lately, it looks like FXCM management is hinting to the market that it is trying to renegotiate the terms of the Leucadia loan, and re-acquire its own upside for its shareholders.

A smart move, in our view.

There probably is some reasonable price at which Leucadia will agree to sell back to FXCM most if not all of the rights it has to both force a sale of FXCM, and to get most of the proceeds from that sale. Leucadia will have made a lot of money on its loan in a very short amount of time, and can use its precious capital to move on to other investments. And FXCM management – still led by founder Drew Niv – gets back control of its own future, and the ability to do what management of public companies are supposed to do – deliver value to shareholders.

As FXCM itself stated, there can be no assurances the negotiations with Leucadia will actually lead to a definitive agreement. But it is clear to us that FXCM management is trying to get there. And they want their shareholders to know that.

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Is FXCM about to restructure its deal with Leucadia?

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