Dealmaking saga over GFI nears conclusion

The six-month saga over interdealer GFI appears all but over but there are many in the market who think the dealmaking is not done yet.

Shareholders have voted down the GFI board’s structured deal with CME Group and tendered their support for BGC Partners’ $6.10-per-share offer, which values GFI equity at roughly $780m. Even the GFI board members such as Mickey Gooch, chairman and co-founder, who tried everything they could to direct their deal to the CME, have accepted their fate.

The reality is that BGC will become the “largest and most profitable wholesale brokerage company”. Many think CME still has a part to play in this drama.

Amid the stories about takeover tactics between interdealer brokers, it got lost that the initial deal involved the break-up of GFI. What CME really wanted, and has been pursuing for more than two years, is Trayport and Fenics, the electronic trading software and risk analytics businesses. A purchase could transform its fledgling European energy trading operations.

These assets are the real crown jewels — especially Trayport. It is a software platform but it allows traders, brokers, utilities and resource companies to conduct voice and electronic trading and clearing of gas, coal, power and emissions in over-the-counter markets in Europe. Widely used in the market, it is a perfect fit for new regulations. There really is nothing out there quite like it.

There is anecdotal evidence explaining why many people expect CME will own it. Most of the rhetoric from BGC to date has been about the brokerage — cutting IT costs and regulatory capital and increasing productivity per broker. There is very little about a push into electronic markets that dominates conversations with ICAP or Tradition, for example. Electronic may be the future but it also needs constant investment.

BGC’s recent record does not suggest it is looking that way either. Deals, such as RP Martin, Smith Mack, Grubb Ellis Newmark and Sterling International Brokers, have all boosted their brokerage business. By contrast, its most high profile electronic trading businesses, eSpeed, was offloaded to Nasdaq 18 months ago for around $1.2bn.

Furthermore Terry Duffy, executive chairman, told Reuters in November he believed the assets were available, even if BGC won. Plus, disposing of the units could be a smart financial move for BGC.

Also lost in the takeover battle noise was that CME was potentially getting a steal with Trayport and Fenics. The valuation applied to the assets by Greenhill & Co for GFI’s special committee is illuminating.

It came up with a prospective range of between $650m and $728m, based on the units making earnings before interest, tax, depreciation and amortisation of $52m for 2014 and an enterprise value/ebitda ratio of 12.5-14 times. That multiple was below the median valuations of 17.6 times it had calculated for similar technology companies, MarketAxess Holdings, Advent Software and UK duo Fidessa Group and First Derivatives. However you look at it, that is most of GFI’s total equity valuation.

But Trayport is built for a hybrid OTC market. As Shaun Lynn, president of BGC, noted on Friday: “We also expect . . . to continue converting voice and hybrid broking to more profitable fully electronic trading, all of which should lead to increased revenues, profitability and cash flows.” Why would it be in a hurry to sell, unless it gets an offer it cannot refuse?

BGC’s sale of eSpeed to Nasdaq may provide the blueprint. A hybrid market (US Treasuries) went fully electronic and BGC got out as newer and faster participants began to enter the market, which would have affected margins.

That led to a hefty outlay for Nasdaq that it has yet to see the full benefit of. Indeed, Nasdaq’s market share fell to 30 per cent at the end of last year. However, if the commodities market stays a more hybrid OTC market, then BGC may hang on to the assets.

True, CME was protecting shareholders by aiming to get Trayport for a low price but it was a mistake not to have significantly offered more. It might well pay for it, one way or another.