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FXCM Proposes Buying Gain Capital – Could Create a

FXCM announced that it has made an official offer to buy Gain Capital (forex.com). Both are publicly traded companies. If the proposal turns into a deal, it would create a broker with $1.6 billion of client assets.

FXCM CEO Drew Niv sent an official letter to Gain’s board of directors and will detail about it in a conference call. This would be a very big move in the forex industry.

Michael Greenberg adds that rumors about this move had been swirling for a long time, and that the recent drop in Gain’s share price now made it a “highly lucrative acquisition target” for FXCM, which enjoyed a comeback of its share prices.

Here are more details from FXCM’s official press release:

FXCM Proposes Acquisition of Gain Capital

Combined Company Expected to be Accretive to All Parties

Conference Call Scheduled for 8:15 a.m. on Tuesday, April 9, 2013

Proposed Acquisition Highlights:

Would create an industry leader with potentially significant benefits of improved scale economics
Pro forma 2012 revenues of ~$569 million, client assets of ~$1.6 billion(1) and estimated post-synergy run-rate Adjusted EBITDA of between ~$163 and ~$183 million(2)
Potential significant operating synergies which can potentially drive between $50 and $70 million in incremental run-rate EBITDA once integration is complete
Potential capital synergies could result in the release of between $80 and $100 million in currently restricted cash
Projected to be accretive in 2014 after excluding one-time restructuring cost
NEW YORK–(BUSINESS WIRE)– FXCM Inc. (“FXCM”) (NYSE: FXCM), a leading online provider of foreign exchange, or FX, trading and related services, today announced it is proposing to merge with and acquire Gain Capital Holdings LLC (“GAIN”) (NYSE: GCAP).

The proposal was communicated this evening in a letter from FXCM to Gain’s Board of Directors, to inform them of FXCM’s desire to reach agreement on a transaction that would create the industry leader in online FX trading.

“FXCM believes that the substantial potential operating and capital synergies between the two companies would result in an accretive deal with a strong growth profile and improved economies of scale,” said Drew Niv, CEO of FXCM. “Additionally, FXCM believes customers of both FXCM and Gain will greatly benefit from the expected improvement of financial strength and stability of the combined entity.”

“This proposed merger is the highest priority for FXCM, and we hope that Gain is as excited as we are about the potential a combined company could have.”

The proposed transaction would give Gain shareholders 0.3996 shares of FXCM Class A common stock for each share of Gain common stock. Based on FXCM’s closing price of $13.39 on Monday, April 8, 2013, this results in an offer price of $5.35 per share of Gain common stock, which in aggregate would represent $210.4 million in total value. This price represents a 25% premium to Gain’s closing share price on April 8, 2013. FXCM is also prepared to offer up to $50 million in cash consideration in lieu of FXCM shares.

1 Pro forma figures exclude transaction fees and other expenses associated with the proposed transaction.

2 FXCM Adj. EBITDA excludes certain items relating to the IPO of FXCM and other one-time charges and non-recurring items.

Conference Call

FXCM will host a conference call to discuss the proposed business combination at 8:15 a.m. (EST) tomorrow. This conference call will be available to domestic participants by dialing 877.303.9132 and 408.337.0136 for international participants. The conference ID number is 34133919.

A live, webcast, a copy of FXCM’s presentation and replay of this conference call will also be available at http://ir.fxcm.com/.

The full text of the letter issued by FXCM to Gain’s Board of Directors follows:

April 8, 2013

Board of Directors

GAIN Capital Holdings, Inc.
Bedminster One
135 Route 202/206
Bedminster, New Jersey 07921

Attention: Peter Quick, Chairman
Attention: Glenn Stevens, Chief Executive Officer

Dear Members of the Board:

I am writing to you, on behalf of the Board of Directors of FXCM Inc. (“FXCM”), to make a proposal for a merger with GAIN Capital Holdings, Inc. (“GAIN”). Under our proposal, we would be prepared to offer 0.3996 shares of FXCM Class A common stock for each share of GAIN common stock (the “Proposal”). Based on FXCM’s closing price as of April 8, 2013 of $13.39, our Proposal represents an offer price of $5.35 per GAIN share, which in aggregate would represent $210.4 million in total value(1). Our Proposal would entitle GAIN’s shareholders to approximately 15.7 million shares of FXCM Class A common stock, or a 16.2% ownership interest in the combined company. Depending on the preferences of your shareholders and their potential desire for immediate liquidity, we would be prepared to include consideration of $50 million of cash in lieu of stock. Our Proposal is not subject to any financing contingency.

Our Proposal represents a 25% premium to GAIN’s closing stock price of $4.27 as of April 8, 2013(1), and exceeds GAIN’s 52-week high(2) of $5.31 on April 27, 2012. We believe that, based on various financial and operating metrics outlined in more detail in the attached slide presentation (the “Presentation”), the Proposal represents an attractive value proposition for your shareholders. Moreover, we believe the substantial operating synergies, capital efficiencies, expanded operating scale, and improved trading characteristics of the combined company present a compelling rationale for this transaction and an attractive opportunity for potential future appreciation in value for GAIN shareholders.

Substantial Operating Synergies: As outlined on slide 11 of the Presentation, we believe our overlap of products, target markets, and regulatory requirements create a unique opportunity to potentially realize material synergies through a merger. The regulatory requirements of maintaining a presence in the world’s major FX markets create high fixed costs for brokers “” by combining businesses, these fixed costs can be leveraged over a larger revenue base. We estimate that when integration is complete, synergies could potentially drive in excess of $50 million in incremental run-rate EBITDA per year.

Capital Efficiencies: We believe the combined entity could also potentially realize significant balance sheet and regulatory capital efficiencies. As outlined on slide 12 of the Presentation, we believe that a significant amount of GAIN’s cash currently restricted as regulatory capital and designated as collateral for trading partners could be freed up and deployed to further enhance shareholder value.

Operating Scale: It is our strong view that scale is critical to success in financial services and especially so in the global FX business, where fixed costs and capital requirements are high and increase with every regulated jurisdiction in which a firm has a presence. We believe that brokers with operating scale enjoy consistently higher margins, lower costs with trading partners and higher returns on equity. Slide 25 of the Presentation illustrates this in a comparison of key metrics of comparable firms including our own.

As illustrated in the Presentation, we believe that the combined company would enjoy several enhanced attributes of our business model, and that GAIN’s shareholders would benefit significantly by participating in the combined company. In particular, we believe that:

Increased, operating scale enables us to maintain / grow trading volume and deliver more consistent results despite significant drops in volatility; and
International diversity has helped us mitigate the impact of changes in local regulations of any one particular key market, and that diversity plus our agency model mitigates exposure to potential adverse regulatory changes in the US market in particular
Attractive Trading Characteristics: We believe our Proposal offers GAIN shareholders the opportunity to hold shares with improved trading characteristics, including greater liquidity, more extensive research coverage, fewer institutional investor limitations, and better correlation with the positive performance of the business. With wider research analyst coverage, average daily dollar trading volume over 8x the average volume of GAIN, and a broader institutional investor base, we believe our proposed exchange of FXCM shares for GAIN shares provides GAIN shareholders with an immediate tangible benefit.

In summary, we believe our Proposal presents GAIN’s shareholders with the opportunity to exchange their GAIN shares for a share in a combined business with significant potential for upside from synergies and scale economics; multiple capital efficiencies; better protection against market and regulatory challenges; and potential for expanded liquidity to realize value in this transaction or at points in the future.

We have engaged Barclays and Financial Technology Partners as our financial advisors and Simpson Thacher & Bartlett LLP as legal counsel. We have completed an extensive, thorough analysis of GAIN’s publicly available information. We do not believe that there are significant regulatory or other impediments to the consummation of the proposed transaction. Our Proposal is subject to the negotiation of a definitive merger agreement. Given our high level of familiarity with the retail FX space and GAIN, we would need only to conduct limited confirmatory due diligence and we are prepared to devote a cross-functional team of senior managers to this important project.

We believe that a merger of our two companies would create an industry-leader, allowing our shareholders to be part of a larger, stronger organization. This merger is the highest priority for FXCM and has the unanimous support of our Board of Directors and management team.

We aim to work together with you and the rest of GAIN’s Board to work through the details of our Proposal. We want to ensure that all of our shareholders are aware of the opportunity to participate in the combined company and are therefore publicly releasing the contents of this letter.

My team and I are available to meet with you, your management team and your Board as soon as practicable to discuss the terms and merits of our Proposal.

We look forward to hearing from you soon and working with the GAIN team to advance the best interests of our respective companies and hope that you will be as excited as we are about the benefits of this proposed combination.

(1) Assumes 39.3 million total GAIN shares outstanding, including 35.5 million basic shares outstanding, 2.2 million shares of restricted stock and 1.6 million shares due to exercisable options. Also assumes 81.6 million fully diluted FXCM shares outstanding.

(2) Based on historical closing prices.

Yours truly,

/s/ Drew Niv

Drew Niv
Chief Executive Officer

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.