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What’s mine is yours

6 November 2015 By Swaha Pattanaik, John Foley

Old broking rivals ICAP and Tullett Prebon are chewing over a deal that lets them take opposing views on the future of trading. ICAP is in talks to sell its voice-trading business and related bits to Tullett Prebon in return for stock, some of which would go to the seller’s shareholders. It’s messy, but has some logic to it.

Each side is serving its own interest. ICAP’s view for some time has been that the future is electronic. Such a deal would therefore leave the company free to focus on the electronic and post-trade risk and information businesses which generate about three-quarters of its operating profit. By contrast, Tullett Prebon insists that inter-dealer brokers will retain their central role in global markets and gets to double down on this bet.

If the immediate market reaction is anything to go by, investors suspect the two visions can co-exist. The combined value of the companies increased by around 440 million pounds after the talks were announced mid-morning on Nov. 6, after investors had already reacted to Tullett’s disappointing results. That’s equivalent to roughly 13 percent of their combined value before the shares started to rise.

Still, the clarity of the two companies’ visions contrasts with the structure of the mooted deal. ICAP would end up as a minority shareholder in Tullett and therefore retain some exposure to the voice-broking world. Meanwhile, Tullett, which would need to issue more than 100 percent of its existing share capital to fund the deal, ends up with a minority shareholder that it probably wouldn’t want in an ideal world. It also runs the risk that some of its newly distributed shares might be dumped by any ICAP investors who prefer a purer technology play.

Granted, both sides can find ways to justify these drawbacks. ICAP might say it is effectively hedging itself against the risk of voice-broking doing better than it expects. And Tullett can argue that minor inconveniences are overshadowed by what it would gain from becoming a much bigger dog in the voice-broking game. Perhaps both sides have a point. But it’s still an untidy way of getting there.


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