StoneX CEO Sean O’Connor released a letter to shareholders as part of StoneX’s just-issued Annual Report for fiscal 2020 (StoneX has a September 30 fiscal year end), which included a fairly lengthy and candid review of the company’s acquisition last year of Retail FX provider Gain Capital. Gain of course operated the global FOREX.com and UK-centric City Index online trading brands.

We’ll post the full text of the letter below, but in summary we’ll say that Mr. O’Connor and his team seem very pleased with their timing – of setting the terms of the deal last February just before the COVID-19 crisis hit, and of closing the acquisition in the midst of the pandemic in late July. Gain Capital had been coming off a horrendous 2019 which saw the company lose $60 million, and was actively looking for a white knight to take over the company.

However Gain Capital ended up performing quite well and made a lot of money from March 2020 forward, as many Retail FX brokers had a banner 2020 thanks to all the market volatility that ensued. StoneX ended up booking an $81 million gain (no pun intended) on its Gain Capital purchase in Q4-2020, thanks to Gain’s improved performance.

The full text of the CEO letter (as it relates to Gain Capital) follows:

In July 2020, we completed our purchase of GAIN Capital Holdings, Inc. for $6.00 per share in an all-cash transaction representing approximately $237 million in equity value and a total transaction value of $329 million – a premium of 12% to GAIN’s tangible book value at the time. We financed the purchase consideration with a $350 million high-yield bond issue – effectively making our debut into the institutional debt markets. This in itself was a big step for our company and we were pleased that the offering was well received and many times oversubscribed and has traded strongly in the market since issue. This opens a new avenue for capital to fund our ongoing growth, if needed. Over time, we believe that we will be able to achieve even more-competitive financing terms as we further establish our credit market credentials.

Founded more than 20 years ago with the intention of providing traders with low-cost access to foreign exchange markets, GAIN serves more than 130,000 retail and institutional investors through its FOREX.com and City Index online platforms, as well as a complementary futures business. It is the largest retail FX firm in the U.S. and has a significant presence in the UK, Europe and Asia.

GAIN’s businesses add significant transaction flow from a new and large global retail client base – that we can process through our existing clearing and execution infrastructure. This enables us to aggregate flow and cross spreads internally more efficiently – in turn driving increased revenue capture. Additionally, our vertically integrated offering of both execution and post-trade clearing services allows us to internalize margins previously paid to third parties. The integration of GAIN into our business also added nearly $1bn in customer float and provided some obvious cost synergies through the elimination of GAIN’s public company costs and the consolidation of our two global infrastructures.

From a strategic standpoint, we are adding a new retail segment that offers a substantial addressable market for us. We can leverage our global network and our products and services to enhance GAIN’s product offering to drive market share growth by capturing additional business from existing clients, as well as enable the acquisition of new clients. Finally, our integration of GAIN’s digital assets and expertise will also accelerate the digitization of our own platforms, which remains a strategic priority.

At the time we agreed to the transaction in February 2020, we believed that this was a well-priced and structured transaction that achieved strategic objectives for both businesses and would be accretive in the short term to earnings, EPS and capital. What we could not foresee was the impact of COVID-19, which led to GAIN realizing record results as market volatility spiked, customer engagement soared, and record numbers of new accounts were opened. These positive results accrued to our shareholders under the terms of the contract and enabled us to realize a sizable gain through the income statement when we closed the transaction in July. GAIN’s exceptional results significantly de-risked an already well-structured transaction, provided us with additional capital, and boosted our core operating results by some 6% in ROE terms.

SEAN M. O’CONNOR
Chief Executive Officer