City Index freeing up cash to move on London Capital Group?

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The FT reports today that City Index is selling its US retail FX business. The division has been a relatively small revenue generator and this is being done in order to free up around $30m of encumbered regulatory capital. With the pound hovering around $1.50, now is a very prescient time to repatriate dollars too.

According to the FT, CEO of City Martin Belsham is on record as saying he “wants to be a consolidator” within the spread betting industry and with the disclosure of their interest, in unison with Cantor Fitzgerald, in LCG 2 weeks ago, odds are that some sort of offer will materialise ahead of the “Put up or Shut up” deadline on March 12th.

LCG’s market cap of £25m with £20m of net cash (and that we have pointed out would be much less if they became part of City or Cantor’s as they would have a lot of cost savings) makes them, in our opinion, a steal at this point in the profit cycle and, a natural response to thepresently saturated spread betting market place. It is crying out for consolidation.

For either City or Cantor’s, absorbing LCG’s client base and valuable white label network would immediately position the victor as number 2 in the market to the leader IG Index. A strong number 2 we think would be good for the entire industry too.

We continue to estimate a take out price, if an offer is tabled, of anywhere between 65-80p, not least given the very tightly held nature of the stock with management holding nearly 30% – enough to block the 75% typical threshold to ensure a bid goes unconditional. With the placing at LCG at the 60p level just under 2 years ago, then a premium to this which put a value of around £15m ex the cash base for the business is still, in our opinion, a bargain. This equates to just shy of 70p per share.

At the current price of 45p, with a pre bid level of 35p and upside potentially of 30p we are happy with our Conviction Buy stance and pairs trade of short IG Index v LCG.

We disclose we are long LCG.

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