The Tasty $1bn acquisition that could catapult IG to the FTSE 100
Sky's Ian King says IG Group's move to capture more of the US market could be seen as pricey but the company is on a roll.
Thursday 21 January 2021 16:32, UK
One of the biggest business trends during the pandemic has been the explosion on both sides of the Atlantic in financial investing and speculation - particularly among millennials.
Commission-free platforms like Freetrade in the UK and Robinhood in the US have seen a huge uptick in activity fuelled by rising markets and a desire among savers to earn more than the nugatory returns available on cash deposits.
An additional factor, early during the lockdown, was a desire among gaming fans to have something on which to speculate in the absence of live sport.
Many of these customers in the US are being catered for by Tastytrade, a Chicago-based business founded as recently as 2011, which today announced a $1bn takeover by the British trading platform and spread betting firm IG Group.
It is the biggest acquisition by IG since Stuart Wheeler, who died in July last year at the age of 85, founded the business 46 years ago.
Tastytrade is a financial network that is watched online through platforms such as YouTube and Apple TV.
Producing eight hours of live programming each week day, its lively features include a market recap called 'Cherry On Top', a programme on the futures market called 'Forward Slash' and one aimed at first-time investors called 'Johnny Trades'.
From this emerged Tastyworks, an independent online brokerage platform, which was founded in 2017. It has more than 105,000 active accounts and claims to account for 1.3% of the entire US equity options market by volume traded.
June Felix, IG's chief executive, said the acquisition would "materially" expand and scale IG's business in the US while helping it further diversify into the fast-growing US retail options and futures market.
She added: "The US market has more than 1.5 million retail traders and is the largest derivatives market in the world.
"Tastytrade has grown impressively and proven itself to be an innovative market disrupter passionately committed to delivering for their clients.
"The financial and strategic rationale underpinning this deal are compelling. I am confident that with our shared client-centric ethos, passion for innovation and growth , IG and Tastytrade will prove a winning combination."
Ms Felix said Tastytrade had enjoyed "exceptional" growth during recent years, with active accounts growing by 64% between the end of 2018 and 2020, while sales grew by 49% during the period.
IG's statement to the stock exchange, announcing the deal, added: "Together, Tastytrade provides ambitious retail traders with the education and confidence to trade in derivative products, whilst Tastyworks provides them with a powerful, modern and easy-to-use trading platform to utilise this knowledge."
It said the company opened a brokerage in Australia in 2019 and was in the process of launching in Canada. The company's colourful co-chief executives, Tom Sosnoff and Kristi Ross, will be staying on after the deal. They will own 6% of the enlarged IG Group after the transaction.
Yet the acquisition is not without its risks.
The Biden administration has already indicated it will be less lenient on the financial services sector than its predecessor.
Wall Street has already been unsettled by news that Mr Biden's choice to run the Securities & Exchange Commission, the top US financial regulator, is Gary Gensler, a former Goldman Sachs executive who became a regulator, later advising Hilary Clinton's election campaign teams in 2012 and 2016. He is expected to be a formidable regulator.
Meanwhile, the Wall Street Journal reported on Thursday that Mr Biden is also likely to appoint Michael Barr, who oversaw a toughening of regulations after the global financial crisis, as Comptroller of the Currency, a key role in overseeing the banking sector.
Moreover, online brokerages are increasingly in the sights of regulators following the heavy losses some inexperienced investors have incurred trading sophisticated financial products like futures and options, precisely the kind of instruments traded by Tastytrade's clients.
Eyebrows have also been raised at the price IG Group is paying for the business.
Analysts Vivek Raja and Paul McGinnis, at the stockbroker Shore Capital, told clients: "The valuation appears full at 18 times historic [earnings] in which is likely to have been a year of supernormal earnings."
Yet most investors will probably give IG, which currently only derives around 4% of its sales from the US, the benefit of the doubt reflecting its stellar performance of late.
This was borne out by record half-year results today, covering the six months to the end of November, with IG reporting that pre-tax profits had more than doubled, from £101.2m to £231.3m, on sales up 67% at £416.9m.
Ms Felix said that IG had enjoyed a "step change in client numbers", thanks partly to higher levels of volatility in financial markets, supporting a record 238,600 clients during the period. Of these, nearly two-thirds were 'leveraged', in other words they were investing using borrowed capital.
Analysts Stuart Duncan and Robert Sage, at the investment bank Peel Hunt, told clients: "This was an impressive set of results, with strong revenue growth and good cost control delivering exceptional profits growth."
The deal is very likely to catapult IG into the FTSE-100. It is all a far cry from when Mr Wheeler, who frequently competed in the annual poker world championship in Las Vegas and who was famously thrown out of Caesar's Palace because he was winning too much, launched IG in 1974 from his spare bedroom.
He conceived IG - it stands for Investors Gold - as a way of helping people speculate on the price of the metal. In the process, he invented spread-betting, where investors do not own the asset being traded but merely bet on whether the price will go up and down.
Mr Wheeler, who gave away much of the estimated £40million he collected when IG floated on the stock market in 2000, later said he regretted selling his stake in the business.
It would be fascinating to know what this shrewd calculator of odds would have made of the transaction.