Update: GFI Group Acquisition

Jul.30.14 | About: GFI Group (GFIG)

Summary

GFI Group is selling its software businesses to CME Group.

The transaction validates one of the predictions from my October Pro article, and represents a 49% annualized return from that point.

However, the deal effectively takes GFI's SEF private and likely denies its current shareholders much greater long-term value.

There is already evidence that the terms of the deal may need to improve for GFIG shareholders.

In October of 2013, I wrote a Pro article detailing the long-term potential of GFI Group (NYSE:GFIG) as an SEF (Swap Execution Facility) and also predicting the sale or spin-off of its software businesses, Trayport & Fenics. This morning's announcement that those businesses will be acquired by CME Group (NASDAQ:CME) validates that prediction and represents 46% premium to yesterday's GFIG pricing, and a ~49% annualized return from my point of publication, when accounting for dividends.

The transaction is technically a merger and sale; the terms are:

  • CME will purchase all outstanding shares of GFIG for $4.55 per share by issuing an equivalent amount of its own Class A Common shares to GFI shareholders, based on the 10-day average closing price of CME.
  • Immediately following this, a private consortium of GFI Group management will purchase GFI Group's wholesale brokerage and clearing businesses for $165M in cash and the assumption, at closing, of approximately $63M of unvested deferred compensation and other liabilities.

Closing of the deal is expected in early 2015. However, the law firm of former SEC Attorney Willie Briscoe and others are already challenging the transaction. Objections are likely to center around the disposition of GFI's SEF, which was the focus of my article. Assuming that CME is merely getting the software businesses, as described, that would mean that the SEF is being taken private. My article cited $7.20 per GFIG share based on a mere return to trend in GFI's brokerage business. As detailed there, the reality is more complicated than that, as the SEF is likely to be lower margin, but higher volume with far lower costs. Nonetheless it seems quite likely that this is an attempt to swindle shareholders out of the much more valuable long-term potential represented by GFI's SEF.

GFI is scheduled to report earnings of 2 cents per share tomorrow (July 31) after the bell, and the Q&A may yield further information on the transaction, outlook for GFI's SEF, and potential for the terms of this deal to improve substantially for GFIG shareholders.

Disclosure: The author is long GFIG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.