Deal: Take-private of IG Group
Size: £143 million ($229 million)
Advisor: Lexicon Partners
Date: September 5 2003
It’s not often that the state of disrepair of a castle in southeast England triggers an innovative finance deal. But that’s what happened this year when high-profile businessman Stuart Wheeler decided to sell his stake in the UK’s leading spread-betting business.
In January, Wheeler announced that he wanted to sell his 23.7% stake in IG Group, the company he founded in the 1970s, to raise money to renovate his castle at Chilham in Kent. Chilham is a 17th-century mansion built around an older Norman keep. Inigo Jones is said to have designed the building, with grounds laid out by Capability Brown.
Eurosceptic Wheeler hit the headlines two years ago when he donated £5 million to the Conservative Party. He set up IG Index, where UK residents could bet on the price of gold, in 1974. IG’s financial betting business grew to the point where it offered spread betting and contracts for differences (CFDs) on products ranging from market indices to commodities and share prices. Ten years ago it started taking bets on sport. In 1996, it started dealing in foreign exchange. It floated in 2000.
Quality castle time When the founder and shareholder decided he wanted to spend more time with his castle, Nat le Roux, chief executive of IG, put together a bid company, IG Group Holdings (IGGHL).
Lexicon Partners, successor to Phoenix Securities which was acquired by DLJ in 1997, advised the management team. A group of former Phoenix and DLJ bankers set up Lexicon Partners in the summer of 2000.
IG’s was no ordinary public-to-private deal. For a start, there is little in the way of deal technology to build on when taking a FSA-regulated business private. One of the few recent precedents was Singer & Friedlander’s disposal of broker Collins Stewart to a management team backed by CVC Capital Partners.
IGGHL chose CVC to back its recommended cash offer, which it made at the end of July. The deal went unconditional on September 5.
“There have been relatively few instances in the UK of taking a relatively large regulated financial trading or broking business private,” says Charles Outhwaite, who led for Lexicon with Mark Hennessy. “Collins Stewart is one, and that’s one of the reasons we chose CVC.”
Bank of Scotland and Intermediate Capital Group are providing £98 million of debt finance to the bid company. IG’s regulated status also made structuring the bid company’s financing package a problem.
“Spread betting requires FSA consent and control, and it was a real challenge to make sure that the financial resources requirements imposed on the bid company could be structured to fit with the private equity and leveraged debt requirements,” says Mark Vickers, a partner at Ashurst Morris Crisp, which advised the lenders.
Specifically, IGGHL had to comply with its financial resources requirement – essentially the same as a bank’s regulatory capital requirement. This complicates a leveraged deal because of the need to work out what constitutes “financial resources” when calculating a business like IG’s consolidated regulatory capital requirements. Different restrictions apply to different levels of funding in an LBO.
And banks are unwilling to provide loans that count as regulatory capital, because these are fully deductible against a bank’s own regulatory capital. Because of the nature of the business being taken private, a large chunk of the loan market is far harder to access.
“The real issue is how you put leverage into the deal in a way that satisfies the regulatory capital requirements of an FSA-regulated business but also enhances the returns for the equity providers,” says Outhwaite.
“IG was valued at approximately £145 million. Its net assets were about £35 million, so essentially CVC was paying about £110 million in goodwill,” he says. “The challenge was to cover a proportion of the goodwill with capital which qualified for regulatory purposes but which, from an equity provider’s point of view, was more like debt.”
One key issue is simply finding a debt provider, not necessarily a bank, willing to provide this kind of an instrument.
The IG take-private gives further proof that some clients value independence in their advisers, and will pay for it over and above fees and commissions they pay to distributors.
This isn’t news to Lexicon Partners. In June, it worked for Bermuda reinsurance broker Benfield on its London listing, sharing the advisory mandate with joint bookrunners Merrill Lynch and Morgan Stanley. Benfield raised nearly £100 million, one of the largest IPOs in London in the first half of 2003.
More bank than bookie Lexicon picked up the IG deal through a referral from Roger Butler, who was chief executive of Newton Investment Management when Mellon bought it in 1997. Phoenix advised on that acquisition, which coincided with Phoenix’s own absorption into DLJ.
Its sports betting business naturally attracts the headlines, but IG Group is more bank than bookie. “From an operational and financial perspective, their approach to managing their business and their book is similar to any other serious City institution,” says Outhwaite. “This is not a betting shop, it is a sophisticated financial services business.”
Nevertheless, it has a strong brand in a sector that should maintain its explosive growth. “IG Group is perceived as one of the strongest performers in a sector which is capturing people’s attention because of the tax-free gains that can be made investing in products that are derivatives of underlying investment markets,” says Vickers. “That is, a bet is tax-free.”
