Another sizable shareholder of Gain Capital is getting behind the movement to scuttle the proposed acquisition of Gain by INTL FCStone. Or, at least to improve the terms of the deal.

Riverside, Connecticut based private equity shop Neustrada Capital LLC, which owns approximately 1% of Gain Capital’s outstanding shares, issued a statement saying that it supports an alternative proposal put forth by Gain shareholder JB Capital, outlined in a Form 13D SEC filing dated May 27, 2020.

JB Capital’s proposal was aimed at Gain’s larger shareholders VantagePoint and IPGL which still officially back the deal. That transaction would see FCStone acquire Gain, along with its valuable and City Index brands, for $6 per share in cash, or a total of $236 million. JB suggested that instead of settling for $6 in cash, VantagePoint and IPGL could have their shares bought out by the company’s large existing cash base for $6.25 per share, which would leave Gain’s other shareholders (including JB and Neustrada) with in their view even more value.

A win-win situation for everyone, especially as compared to (just) $6 in cash for everyone.

Neustrada Capital said that it also sent a letter to the Gain Capital board on May 25, 2020 that it did not support the transaction for these reasons:

  • The extraordinary earnings since the transaction was announced.
  • The estimated net cash per share of $5.80 on May 31.
  • The estimated tangible book value of $8.10 on May 31.
  • The fact that the fairness opinion dated February 26 has not been updated.
  • Three Directors support Neustrada’s view.
  • The projected earnings power of $2.15 to $2.40 per share the company articulated in the attached presentation has been clearly substantiated.

Further, Neustrada noted that the Board’s own actions suggest the price is too low. Specifically:

  • Repurchasing 8.2 million shares in 2018 at $7.73/share.
  • Repurchasing 1.12 million shares in 2019 at $6.20/share.
  • These purchases were made at approximately book value. You are now recommending holders sell shares at an approximate 25% discount to book value.
  • These purchases were made when the company had approximately $130 million debt outstanding versus a negligible amount at the projected closing date.
  • The Board awarded Mr. Glenn Stephens [Gain Capital’s CEO] incentive compensation for 2020, however, shareholders are not able to share in 2020’s earnings.

In the meantime….. FCStone itself seems fairly confident that the deal will go ahead, raising $350 million late last week via an issue of 5-year Senior Secured Notes. The notes are rated in the “junk bond” category by Moody’s at Ba3 and by S&P at BB-, and carry interest of 8.625%. (Moody’s actually noted that it has put FCStone on review for a possible downgrade due to the proposed Gain acquisition).

Interestingly, however, the amount raised is well beyond the amount FCStone really needs to close the deal. As noted above the deal value (at $6 per share) is $236 million. Gain had $80.3 million of debt on its books as of March 31, 2020 in the form of convertible notes, but it also has a lot of cash on hand – $293 million.

Is FCStone gearing up to (significantly?) up its offer for Gain Capital?

The Gain Capital shareholder vote to approve (or disapprove) the deal with FCStone is scheduled to be held this Friday, June 5. It might be an interesting few days leading up to that event.