Yesterday’s announcement that CMC Markets is going public was certainly big news, but left a number of questions open for those in the industry, and in the London City world as well.
At what valuation will CMC go public?
What percentage of the company will be publicly floated?
How big will the offering be?
We are pleased to have the opportunity to speak during this very busy time with CMC Markets founder, CEO, and 90% shareholder Peter Cruddas on the issue of the CMC Markets IPO. But before we get to the interview, a few notes regarding the above issues, which the company itself cannot yet comment on as is usual in pre-IPO situations.
Following some investigative work by LeapRate reporters, and discussion with industry sources, we have pieced together some of the rough details of the planned offering and how CMC is likely to look post-IPO.
Valuation: As we reported earlier, CMC Markets did about £20 million net profit in the first half of fiscal 2016 (to September 30, 2015, CMC has a March 31 year end). We believe that 2H fiscal 2016 will be slightly better, meaning run rate annual net income of about £40-45 million. Applying a net income multiple of 18x, i.e. that at which CMC rival IG Group Holdings plc (LON:IGG) trades, means that CMC will be targeting a valuation in the £720-800 million range. Companies which go public usually do so at an ‘IPO discount’ to entice more institutional investors to do the work to come on board as shareholders, so we guesstimate an IPO valuation for CMC in the £650-700 million range.
Size of Offering / % of Company Floated: Peter Cruddas has covenanted in the offering documents to a hard lock-up of his shares for 2 years, and that he will hold at least a 50% stake. We believe that he will try to sell most of the rest of his 90% interest in the company (but remain at about 60%), meaning that Mr. Cruddas will sell about 25% of the company, or about 27% of his total current stake in CMC. CMC Markets’ other major shareholder, Goldman Sachs (10%), is likely to look to sell a matching relative amount of its stake, or about 3-4%. In addition, the company itself will sell a limited amount of new shares, looking to raise about £17 million in the process to cover offering costs and costs related to staff incentives as part of the IPO (more on that later).
So, in total, about 30-35% of the company will end up in the hands of the public post-IPO.
And the offering should bring in to Cruddas, Goldman and the company a total of about £200-230 million, i.e. about 30-35% of the £650-700 million valuation range.
Anyway, enough about numbers for now. Here is a paraphrasing of our discussion with CMC Markets founder, CEO and controlling shareholder Peter Cruddas.
LR: Hi Peter, and thanks for joining us on what must be a very busy day for you. I’d imagine that every CEO remembers the day on which he or she announced the company’s IPO. But you seem to have chosen a somewhat risky time to launch CMC Markets’ IPO. Equity markets are very jittery right now, not a great environment for going public. Why now?
Peter: You’re right, the financial markets are on edge right now, and the IPO market has been relatively quiet for some time. But CMC has been around for a long time. The company is 26 years old, and was the first broker to offer online trading in Europe. Leading up to the IPO announcement we did a series of early-look roadshow meetings as well as in-office meetings with many leading institutional investors, and we received good support for an offering.
The environment for an IPO is not ideal, but on the strength on our results I am confident that we will achieve a successful result. Investors are always looking for good companies with good growth stories.
As far as why go public in the first place, we do believe that it is in the company’s best interests to become a public company, as we continue to grow and attract clients from around the world.
LR: One of the more interesting and different elements of your IPO announcement is the Client Share Offer, giving existing and new clients of CMC the opportunity to buy shares in the IPO on preferred terms. Fairly neat marketing idea we’d say, leveraging your IPO event to attract new clients. Can you expand a bit on the plan.
Peter: We’re very proud of the fact that half of our clients have been with us for four or more years. If not for our clients, we would not be where we are today. The Client Share Offer is a way for us to give back to our clients and reward their loyalty.
I’d note that this is not a giveaway nor a quick money scheme. Eligible clients will receive one bonus share for every ten CMC shares acquired and held continuously for 12 months following the IPO. Again, long term reward for loyal long term clients.
We’re also launching an employee incentive plan to help both retain and reward our employees, another important factor in our success.
LR: You’ve stated in the IPO announcement that CMC is targeting £250 million of Revenue within four years. How do you plan to achieve that?
Peter: The old fashioned way – continuing to pursue growth opportunities, and continuing to invest in our company. We’ve invested nearly $100 million in our Next Generation trading platform over the past five years, and the results of that investment have been showing in the growth we’ve experienced lately.
I’d also note that unlike some of our competitors in the UK, we are a fairly well diversified company with about 1/3 of our business from our home market in the UK, 1/3 from Europe and 1/3 from the APAC region. We believe that we can continue to grow in each of those regions.
We are also adding new products, such as Binary Options and Countdowns.