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BGC Partners, Inc. (NASDAQ:BGCP)

Shareholder Analyst Conference Call

April 01, 2013 06:00 pm ET

Executives

Jason McGruder – Head of Investor Relations

Howard W. Lutnick – Chairman and Chief Executive Officer

Analysts

Richard H. Repetto – Sandler O’Neill & Partners LP

Jillian Miller – BMO Capital Markets

Patrick O’Shaughnessy – Raymond James & Associates, Inc.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Operator

Good day, ladies and gentlemen and welcome to the BGC Partners Incorporated Conference Call. My name is Ayesha and I will be your coordinator for today's call. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session, towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Jason McGruder, Head of Investor Relations. You may proceed sir.

Jason McGruder

Good evening. BGC issued a press release this afternoon discussing our proposed transaction with NASDAQ OMX. This can be found at either the news center or Investor Relations sections of our website at bgcpartners.com. NASDAQ OMX issued a separate release on the same topic which can be found on their website.

In today’s call, we may be referring to results on a distributable earnings basis. Please see our most recent financial results press release for GAAP results. Please also see the sections of our most recent financial results, press release entitled, Distributable Earnings, Distributable Earnings Compared With GAAP results, Reconciliation of Revenues Under GAAP and Reconciliation of GAAP Income to Distributable Earnings for a definition of these terms, and how when and why management uses them.

Unless otherwise stated, whenever we refer to income statement items such as revenues, expenses, pre-tax earnings or post-tax earnings, we are doing so only on a distributable earnings basis. I also remind you that statements on today’s call regarding BGC Partners business that are not historical facts or forward-looking statements and involve risks and uncertainties, except as required by law BGC undertakes no obligation to release any revisions to forward-looking statements.

For a discussion of additional risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, BGC Securities and Exchange Commission filings including not limited to the risk factors set forth in our public filings including our most recent Form 10-K and any of these such risk factors contained in subsequent Form 10-Q or Form 8-K filings.

These risks also include those related to possibility of the transaction we are discussing on this call does not close in a timely manner or a possibility of the condition to completion of the transaction including receipt of required regulatory approvals are not satisfied, possibility that any of these expected benefits of the proposed transaction will be not be realized, the effect of the announcement of the transaction of BGC’s business relationships, operating in general competitive economic and political market conditions and fluctuations and actions taken or conditions imposed by regulatory authority.

I’m now happy to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners.

Howard W. Lutnick

Good evening everyone and thank you for joining us for this call in such short notice. We are very pleased to announce that we have entered into an agreement to sell our benchmark, on-the-run US Treasury Fully Electronic Trading Platform to NASDAQ OMX. Total consideration for this transaction is up to $1.234 billion, which consists of $750 million in cash and up to $484 million of NASDAQ OMX stock to be paid ratably over 15 years provided that NASDAQ OMX as a whole produces $25 million in gross revenues each year.

While this is structured over 15 years, upon certain events, including a change of control or sale of NASDAQ assets, this timing could be accelerated. The specific number of NASDAQ OMX shares recalculated upon the close of this transaction.

We expect the deal to close around the middle of this year after clearing customary conditions including antitrust preview. We are selling only our on-the-run benchmark two year, three year, five year, seven year, ten year, and thirty year Fully Electronic Trading Platform for U.S. treasury notes and bonds. This platform generated just under $100 million in revenues in 2012.

BGC retains all of our other voice, hybrid, and fully electronic trading, our market data and our software businesses, including our of-the-run US Treasuries, as well as our Treasury Bills, Treasury Swaps, Treasury Repos, Treasury Spreads and Treasury Rolls. We will continue as well to voice broker the on-the-run benchmark US Treasuries.

Today’s announcement makes clear the value of the business model that we have built over the past 15 years. First, investing in voice-only markets, then along with our brokers creating voice and hybrid market places and ultimately converting our hybrid markets to Fully Electronic Trading Platforms.

The total consideration for this transaction up to approximately $1.234 billion is actually greater than BGC’s current fully diluted equity market capitalization as of the close today. This deal demonstrates our commitment to maximizing value for our stockholders and we expect to consider additional ways to further unlock value.

The assets we are selling generated just under $100 million in revenue in 2012 and constituted less than 6% of our overall revenues last year, while consensus analysts have us generating around $1.850 billion in revenues for 2013. We think the market was clearly undervaluing the assets of BGC.

Our remaining technology based fully electronic products grew over 25% per year compounded over the past two years. We expect our remaining high margin fully electronic products to continue to grow quickly and as today’s news makes clear, they should be valued significantly higher.

We will also continue to grow and invest in our significant real estate services segment, which has been generating well over $500 million a year in annualized revenues. Our balance sheet will be significantly strengthened post-closing, and we have the financial wherewithal to maintain our dividend for the foreseeable future and to repurchase our common shares or units.

So operator, I am now ready to answer questions, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Rich Repetto with Sandler O'Neill. You may proceed.

Richard H. Repetto – Sandler O’Neill & Partners LP

Good evening, Howard.

Howard W. Lutnick

Good evening.

Richard H. Repetto – Sandler O’Neill & Partners LP

Howard, you said in the past that the electronic business had the highest incremental margins. So is it fair to say that the 45%, I think you said quote 45% to 75% or 70% incremental margins held in the eSpeed business?

Howard W. Lutnick

Yeah. Well, taken as a whole, I think we put out our fully electronic numbers at and around 50% margins I think. We are always investing in new businesses and we’re always building things. So if you took it as a whole, I think we put out numbers in the past at 50% and depending on how one invests in the business and what other kind of assets they have, obviously those margins can be high.

Richard H. Repetto – Sandler O’Neill & Partners LP

Okay. When you get the $750 million in cash, you mentioned a few things you could do, but you also had the $450 million in debt. Can you outline plans on what you do to try to enhance shareholder returns when you do get the $750 million, is the debt pay down one of the options?

Howard W. Lutnick

Well, I think another way to think about it is our debt goes out over many years and the NASDAQ stock that we will be receiving goes out over many years and the NASDAQ stock we’re going to be receiving exceeds our debt. So not only will we have – if you take those two together, you’d have a company with no debt, with probably $100 million plus in value and I don’t know, more than a $1 billion in cash on its balance sheet, net of all debt. So you have a tremendously valuable enterprise with – I don’t know if you took the statements I made – you guys have it still in $1.85 billion, if you take the $100 million out of that, we have $1.75 billion in revenues from that company.

And I just do not think market generally up until now has understood the assets of this company and I think what we are trying to do is to prove to everyone that the assets of this company are substantial, they are very valuable and what we have built overtime and we will continue to build are things that will make our shareholders a substantial amount of money. That’s my job as the CEO and I think that’s the job of my management and the people working here is to drive shareholder value.

Richard H. Repetto – Sandler O’Neill & Partners LP

One last question in that vein Howard. So suppose you will have the $1 billion when it closes. Is it - how are you going to return that? How does that get back to shareholders? Like you have the potential to do a $1, $1.50, $2 dividend, would that be one of the reasonable alternatives?

Howard W. Lutnick

I can safely say that there is nothing off the table today. But I could also safely say that, today I’m announcing the transaction, I’m not announcing anything else. So I think we will consider all the ways to bring shareholder value, and to maximize shareholder value. But I think what has just been learned by everybody is if they take a good hard look at the assets of this company they will see that they are of tremendous, tremendous value. And as we continue to build them, you’ll see our fully electronic businesses are really growing substantially. They are in great places and they are to us very valuable. As you know, Rich, since you’ve covered us for many years, we have invested massively in this business and that has made us look less attractive on a day-to-day basis. Today is not that day. Today is the day that you take a look at how much we’ve invested and say, wow, these guys actually have tremendous assets they’ve invested in. Sure, it made their quarters look less attractive, there maybe some others, but their asset value is substantial.

Richard H. Repetto – Sandler O’Neill & Partners LP

I get it Howard, congratulations. Thank you.

Operator

Your next question comes from the line of Jillian Miller with BMO Capital Markets. You may proceed.

Jillian Miller – BMO Capital Markets

Thanks. So in all of your presentations, you guys point out that the rates markets are poised for growth just given the massive debt issuance and end of quantitative easing. So I guess given that's your perspective, what was kind of the main driver behind your decision to sell eSpeed now when we're at a cyclical trough versus potentially waiting 18 months for that market to explode, and then looking at what value you might achieve there?

Howard W. Lutnick

Well, look I do agree, as you’ve heard me say many times that quantitative easing is holding back the market, the concept of the US Fed buying the bonds by the US Treasury and financing them overnight seems – if I told you, I was going to say that three years ago either last. But that’s what’s happening now, no hedging on those transactions. It is as you have said, dramatically holding back the volume. And I do absolutely agree over time that when that quantitative easing stops and when the full power of the deficits running by the U.S Government is unleashed on the wall.

The volumes in this market will grow. But my job the way I see things is, that my company and my shareholders, my stockholders, my employees. We are not getting real value, the correct value for the assets of this company. And I felt that the time was right to do a transaction, I think it’s a great home for this product with NASDAQ. I think they will be successful with it. And I think it’s going to prove to everyone that this company is of tremendous value. And my employees are going to work tomorrow, knowing full well that they can drive tremendous value. And my shareholders are going to understand that the management of this company is not hoarding things for the rest of our lives. But is rather deeply interested in making sure that our shareholders understand what the assets of this company were.

Jillian Miller – BMO Capital Markets

Okay. You mentioned that eSpeed is 6% of revenue, but I'm assuming it's a substantially larger percentage of distributable earnings. Do you happen to have like what percentage it made up in 2012?

Howard W. Lutnick

I don’t have that number to put out now, but the company did I think we put out that our EBITDA last year was $317 million. So I think we – this is a first rate company that produces first rate cash flow, and we’ll continue to do so prospectively from our view. And I think we have now the financial strength to execute any plans that we want, the financial strength to continue to pay out dividend for the foreseeable future, and the financial strength for people to understand that we produce great products with great value. And ultimately, we will produce shareholder value with them. So I think over time we will talk about those details and I’ll make sure I will lay them out over time. I just don’t – I’m just not prepared today to discuss this.

Jillian Miller – BMO Capital Markets

Okay. Maybe just trying again at I think what Rich was trying to get at, I mean, when you just said this gives us the ability to continue our dividend for the foreseeable future, it sounds to me like you're signaling a continuation of regular dividend versus maybe an increase of the regular dividend. Is that just kind of semantics that I shouldn't be reading too much into or is that kind of how you're thinking about it?

Howard W. Lutnick

Yeah, that is semantics that you shouldn’t be reading too much into. Look, it made no sense to us here that with a $0.48 dividend, then our stock should trade in and around $4 and a 12% yield when our dividend is very, very tax efficient. And last year 96% of that dividend – that $0.48 was non-taxable. It made no sense will be the kindest way I could possibly say.

So if the market says, gee, with the kind of financial resources you have, they should view the dividend as rock solid and therefore it should trade at a more appropriately yield, that at least is the beginning. And then they can say, well your financial resources are so great that you have probably more cash or as much cash as the market capital of the company was, plus you have all these other businesses. Soon or later people will realize and I expect to execute on that, that this company is very valuable. And I don’t want, and I want the shareholders to get the full value of it. And I will take whatever action is necessary to bring that to bear.

Jillian Miller – BMO Capital Markets

Okay. Thank you.

Operator

Your next question comes from the line of Patrick O'Shaughnessy with Raymond James. You may proceed.

Patrick O’Shaughnessy – Raymond James & Associates, Inc.

Hi, good evening. So my first question will be, Howard, you just talked about, maybe there are additional ways that you guys have to unlock value down the road. And obviously, it's probably a little bit premature to speculate on what those would be, but maybe just more broadly, are there other portions of your business – are there other highly electronic portions of your business that it would really be feasible to carve out from the voice or from the hybrid business or is this franchise – these big franchise really unique in that regard?

Howard W. Lutnick

Well, I don’t think I am going to comment too specifically on that, but basically we can create value when we want. Okay. And you should not count out our ability to produce assets with tremendous value. We have lot of assets with tremendous value. You have heard me say, I cannot imagine how the market has not understood the tremendous value in our real estate business, right?

We have a great real estate business, a superb world-class real estate business and the market is not valid, as if we didn’t have it, which is almost as if we add it for zero. It seems remarkable to me. And if this makes people highlight it and say well what you think that real estate businesses is worth. I mean I think you would see that this company is a spectacular investor and has made some spectacular choices. And yes, our electronic businesses are not life and death connected to hybrid.

If you think that, you are wrong, but we’re going to make maximizing choices relentlessly going forward and we are going to continuously invest in things because that’s the way we do things and every once and while we are going to prove to everyone that our investments have well paid off. Today is an example, but not the last of it.

Patrick O'Shaughnessy – Raymond James & Associates, Inc.

Okay. That's fair. Second question, so on NASDAQ's call they implied that this was kind of surprise that the asset was available for sale. They're excited to participate in that process. So I'm inferring that you guys were the ones who initiated it and you kind of put out feelers saying, hey, who would be interested in this? Will your lawyers let you talk about the process, how this came about?

Howard W. Lutnick

I think I can talk about the conclusion, which is the press release we put out today. I really don’t think that I care to talk about the process because it’s not important.

Patrick O’Shaughnessy – Raymond James & Associates, Inc.

Okay. Fair enough. The next question I had was, we had a couple of questions about do you have more room to increase your dividend? Let me ask it this way. So you guys have historically had a dividend payout policy where you want the dividend to be X percentage or greater of your distributable earnings. Now you're carving off and selling this eSpeed unit, your distributable earnings power is going to be less. Are you comfortable with the dividend policy where your regular quarterly dividend could potentially exceed your distributable earnings?

Howard W. Lutnick

Well, I think it will be up to the board to sit down and look at the financial power of our balance sheet and the prospective business of the company to make that decision. But I think we have a growing real estate business, we have a growing fully electronic business, we have the ability to invest in assets and in businesses, the way we want and I would not think that and it is certainly not the view of this company that shrinking is one of the views of the world. I think we can grow, I think we can build, and I think we will be very successful.

So, yes, on the day we close, where we take out the revenues and the profits of our benchmark U.S. Treasury business, of course, but between now and then can we grow and build, we can and we will take a look at that at the time and I am sure we will try to be clear to the market, but we do have the financial wherewithal and currently the expectation to maintain our dividend for the foreseeable future.

Patrick O’Shaughnessy – Raymond James & Associates, Inc.

Got you. And the last one from me is, does Graham have an early announcement to what any capital gains you guys might have on this business unit?

Howard W. Lutnick

That’s not for today’s call. I think we will be happy to go through that at a later date, but not for today.

Patrick O’Shaughnessy – Raymond James & Associates, Inc.

All right. That's all from me.

Operator

(Operator Instructions) Your next question comes from the line of Niamh Alexander with KBW. You may proceed.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Hi, thanks for taking my call on for (inaudible) and congratulations. It seems like a pretty good price for a good business and to your credit, we haven't kind of valued the business other than sum of the parts, because we weren't aware that you were interested to sell, any of the sums of the other parts of the business. But, going forward, which is how we all have to plug our models and think about your valuations, you just got yourself $2 in cash for 25% of your earnings.

So I guess, perhaps Patrick's question was like okay, you like to distribute what you are earning, you're taking a big chunk to hit to your earnings, you're saying we're not about shrinking, we are about growing.

So are you comfortable with transitioning for a while, where you're paying out more than you're earning? And do you think this $2 is going to get put to work back in the business or is more of it going to get put to work in terms of distributions and that's the first round of questions.

Howard W. Lutnick

Well, I would say that the – number one, $750 million over our share count excluding our convert is a higher number. Number two, we do expect to receive $484 million NASDAQ stock over and worse case, 15 years and at best case sooner. So our total view of the transaction is $1.234 billion, not just $750 million, while the $750 million is nice, $484 million additional is better and so we have it coming in two ways. And we are going to examine how best to maximize our shareholder value.

What we’ve made clear today is that, this company puts that high on the list, very, very high on the list. And if I have not made myself clear over the years that was what we thought and I am sorry for my lack of my ability to communicate better and but this is something that’s important to us. It’s important that our shareholders be successful and I think we’re going to examine what to do and how best to do it. I don’t want to be no uncertain terms that we consider shareholder value violated.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay. Fair enough, Howard, and then I guess, sorry to ask, could you repeat but what was the contingency, I thought it was something to do with tax, but did you say that the revenue was $125 million and it generated $100 million last year or was that the correct number?

Howard W. Lutnick

So, I am not quite sure which question you are asking there.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

So what's the contingent for the $484 million to kick in, like what is the earnings level or the revenue level, what drives that?

Howard W. Lutnick

I am going to explain it slowly, which is NASDAQ OMX, taken as a whole needs to achieve $25 million of gross revenue per year for us to earn our earn-out.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

NASDAQ OMX Group has to earn $25 million a year?

Howard W. Lutnick

In revenues.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay. That's interesting. Not even just the eSpeed business but NASDAQ Group?

Howard W. Lutnick

That’s why I said it slow.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay. Fair enough. Thank you. Appreciate that. And then I guess the last, we're just getting our heads around the valuation. The last part was $100 million, so all of your electronic assets was like $143 million or so last year. So the other one is the FX component, right, and BGC traded really a core part of the hybrid core broker-dealer. So that's not something that we could necessarily think about being separately carved out, or anything like that, correct?

Howard W. Lutnick

I guess going forward, although not on this call, I will sit with my team and we will try to help you understand our business more clearly, okay and we will work hard to do so. But I don’t think most of our business is what we consider fully electronic means that it can transact without the assistance of a broker, okay. That means it can transact without the assistance of a broker, it is not what – that is how we define it, meaning, it can stand on its own. It doesn’t mean that other people who discuss these things don’t include hybrid sort of in that model, right, we do not. We do not consider hybrid in that model. We see voice and hybrid. That's one number, and we see fully electronic is quite another.

So this was a portion of our electronic business and I will try to go over and make those points more clear overtime. Obviously, I am not prepared to do that tonight, but our team will make that point to you pretty clearly going forward.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Sure. It sounds good. And then just lastly, thank you and the business, was that fully wholly owned by BGC Partners or was maybe part of it owned by Cantor or some partners?

Howard W. Lutnick

You mean the business of our benchmark on-the-run US Treasuries?

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Yes, the business or the assets that you sold to NASDAQ, was that fully-owned by BGC?

Howard W. Lutnick

Yes.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay. All right. Thank you.

Operator

You have a follow-up question coming from the line of Richard Repetto with Sandler O'Neill. You may proceed.

Richard H. Repetto – Sandler O’Neill & Partners LP

Howard, I'm going to try this from a different angle here, but and could you give us a ballpark range of what you think might be taxable of the $750 million?

Howard W. Lutnick

I think we are going to go – remember, as I have said before, the company has enormous built up tax. I guess opportunities to create non-cash tax expense and that’s why our tax rate has been very low. So I will examine that and see the most clear way to do it, but you’ve gotten used this company being very, very tax efficient and you should not expect this transaction to be any different.

Richard H. Repetto – Sandler O'Neill & Partners LP

Right. And you said you've invested close to – whatever – overall Company – I’m sure a lot with technology here, implying that this shouldn’t be a huge gain, plus the low tax rate. Is that fair to say?

Howard W. Lutnick

Yeah. Look, there is – I mean, I’m not ready at this point to talk about the whole tax issue and how you should look at it. I guess the point that I was trying to make is, this is obviously going to be sold at more than our basis, that’s for sure. But this company has many built up if you will tax reductions available to it and so I will express that to you and we’ll discuss it going forward as we get closer to the closing date how better to look at that. But we expect to be very tax efficient with respect to this and to keep lion share of the money substantially.

Richard H. Repetto – Sandler O'Neill & Partners LP

Got it. And just one clarification, the $25 million in gross revenue, that has to be, I would assume, from after NASDAQ buys eSpeed, what eSpeed generates for NASDAQ, correct?

Howard W. Lutnick

See, I didn’t say it slowly enough.

Richard H. Repetto – Sandler O'Neill & Partners LP

Well, you said it was NASDAQ OMX Group?

Howard W. Lutnick

That’s right. That’s why I said it slowly.

Richard H. Repetto – Sandler O'Neill & Partners LP

Okay. That doesn't make total sense to me, but you're saying overall all NASDAQ businesses, including the cash equities, all they need to do is generate $25 million in gross revenue?

Howard W. Lutnick

Yes.

Richard H. Repetto – Sandler O'Neill & Partners LP

Okay. All right. Thank you.

Howard W. Lutnick

No problem.

Operator

There are no further questions in the queue at this time. I would now like to turn the call over to Mr. Howard Lutnick for closing remarks.

Howard W. Lutnick

Well thank you for joining me on such short notice. I think even some of the questions you guys have asked I think there is a good way for you to rethink the way you look at our company. We have great assets, we’ve great employees, we have great assets I think the company will flourish going forward with tremendous financial strength.

I think our shareholders will have renewed respect for my management team and the things that we achieved. And I want to make a special comment to – I think working with the people from NASDAQ, these are first class people and they are hiring, they made a deal to acquire great business with great people associated with it and we wish them only the best and success. And we think they will have success and we wish them that.

So thank you all for joining me this evening, and we look forward to speaking to you again soon. Thanks everybody.

Operator

Thank you for your participation in today’s conference. That concludes the presentation. You may now disconnect. Have a great day.

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