IG Group: Pah!

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IG Group (IGG.L, FTSE Mid-250, Market Cap £4.4bn, 1348p, currently 3.7 per cent of the JIC Portfolio)

IG Group Holdings plc is a United Kingdom-based global financial technology company. The Company delivers online trading platforms and an educational ecosystem. The Company’s products include OTC leveraged derivatives, exchange-traded derivatives and stock trading and investments

Back in the 1990s, a UK company made a “transformative” acquisition in the US. At our morning meeting, the analyst responsible for the sector was expounding the virtues of the deal. I meant to go “pah” under my breath, but rather embarrassingly it came out louder than expected for all to hear. Apologies followed to the young analyst. However, I was right. It was a disastrous acquisition.

On Friday, when updating my diary on IG’s proposed acquisition of Underdog, I should have greeted it with a big “pah!”

The market’s reaction has been to mark the share price down 20 per cent from Thursday night’s close.

From what I understand. The main concerns are:

· Regulatory risk; Underdog is a predictions market business. It looks like the Supreme Court, and various states are looking to challenge whether these “prediction market” businesses are “dressed up” gambling businesses.·

IG paused its £125m buyback to fund the deal.·

It is overpaying at 2.6x revenue and 11x EBITDA

It is difficult to refute the first point, except to say that $200m (roughly 20 per cent) of the cost of the acquisition is dependent on future performance.

As for the second point, I like buybacks but only if the management cannot invest the money to increase the overall returns of the business. If this deal works out like Corcoran thinks it will, it falls into that category. The problem is that we will have to wait some time to find out. In the meantime, regulatory concerns hang over it.

It does look like an expensive acquisition but, given the high returns of these “prediction businesses” it could well pay off. We will have to wait at least until year two and into year three to find out whether it was worth it. “The Acquisition is expected to be broadly neutral to adjusted EPS in year one, double-digit per cent accretive by year three, and to deliver a return on invested capital in excess of IG’s weighted average cost of capital in year three, in line with IG’s capital allocation framework^.”

Conclusion: Breon Corcoran needs to get out and persuade the markets that this is a good deal, as right now it’s gone down like a cup of cold …. Given how oversold it is, it’s tempting to add, but I’m not going to. If I didn’t hold it, would I be buying it now? No. I would watch to see how it plays out. So, why aren’t I selling it? Because it is so oversold and, without the acquisition, looks like good value. I think Breon Corcoran will come under pressure from some of its largest shareholders, listed below. He has destroyed a lot of value in two days. Sometimes it’s right just to sit on one’s hands. A 3.7 per cent position is quite enough given the extra risk Corcoran has added to the company.