The sale of electronic communications network (ECN) Hotspot has not only sparked talk of further consolidation in the FX alternative trading platform space; it has also increased the buzz surrounding EBS, the market’s dominant spot broker.
Many participants dismissed the notion that Hotspot was up for sale, purely on the basis that its main backer was Joe Lewis. According to the Sunday Times, Lewis is the UK’s 15th-richest man with a personal fortune of £2 billion. The belief was that he was happy to keep bankrolling Hotspot.
But billionaires don’t stay rich by throwing good money after bad and it seems that in the past couple of months, Hotspot lost not only some of its liquidity providers, but also the support of its benefactor.
Industry sources are somewhat surprised at the price Hotspot was sold for. Knight Capital paid just $77.5 million cash for the company, which apparently made a pre-tax profit of $9 million in 2005. The establishment of a ‘benchmark’ on a trading platform’s worth will provide encouragement to those looking to consolidate.
As for EBS, the noise about whether or not it is up for sale is growing louder. One source said that a deal has been done and that the buyer was Icap, although another points to a large data vendor as the predator. A source within EBS says that no decision has been made on a sale to anyone, but that effectively nothing has been ruled out or ruled in and that it will continue to examine its strategic options.
How much is EBS worth? As the FX market’s predominant broker, it should attract a healthy premium. But using the Hotspot deal as a benchmark, talk of a £1 billion takeover looks extremely far fetched, especially what is in the public domain about EBS’s financial performance.
The latest set figures for the EBS Group, filed at the UK’s Companies House, report that the company’s revenue in the year ending 2004 was $187 million. If these figures are to be believed, EBS’s margins are appalling. Its pre-tax profit was just $15.6 million. The company’s cost of sales was apparently $76 million, which appears high when it has such a large captive audience; its administration costs were a further $95 million.
EBS will not discuss its financials, so it is impossible to determine why its margins are so poor or to ascertain at this stage if profits are reported elsewhere. As for an imminent deal, this seems unlikely in the immediate term. Each of the broker’s 13 shareholders are represented on the board.
Getting these to agree on whether tea or coffee is served at board meetings is probably difficult. Getting consensus on whether or not to sell EBS’s business, and then who to sell it to, must be a near impossibility.
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