Special Feature
With the breakdown in takeover talks at LCg from all the interested parties — gain Capital, City index and Cantor index, we provide an update here as to our current thinking with the stock price now trading at 28p. It seems we were very lucky initially in calling the stock a Conviction Buy at the 39p level on the 11th February, as only the following day the stock announced that the company had received multiple takeover approaches. Over the ensuing few days the shares proceeded to hit a high of 57p, but in hindsight we were wrong to stick with our bullish call, expecting an actual bid to transpire from one of the three parties and postulating that it would need to be higher than the last placing price of 60p. In fact, we felt that 70-75p was fair value for the business and very likely to be required in order to tempt management to sell and whom between them hold a key stake in excess of the all important 25% — which is a blocking vote that could have stopped a takeover. On any traditional valuation metric the shares are woefully undervalued — trading at a £5m discount to the company’s own cash resources (net of client funds and broker deposits). That’s right, a discount to net cash and, as we stated in our blogs during the bid period, given that the company made on average approaching 5p of earnings per share over the last five years, if they are able to restore profitability to any semblance of this under the new stewardship of Mark Slade, then the re-rating could be very sharp indeed. So why did the bidders walk away given the cheap valuation? Unfortunately we were not privy to the negotiations!
46 | www.financial-spread-betting.com | April 2013
But, we can speculate that two issues were a factor — firstly the litigation they are involved with in relation to an FX fund may make a dent in that cash pile. With surplus cash of around £7m over their regulatory capital requirement, should the worst come to pass here and they are required to pay meaningfully more than the £3.6m that has been provided for thus far, then a new capital raising could very well be on the cards barring an exceptional first half.
Secondly, it is industry tittle-tattle that their “white label” model (where they essentially rebrand their Capital Spreads platform for 3rd parties in exchange for the 3rd party taking up all marketing costs and LCG then share a portion of the “spread”) is actually crimping their profitability as some of the spread share deals that have been struck leave very little meat on the bone for LCG.