Playtech dodges the CFD bullet

Playtech dodges the CFD bullet

Tuesday, December 13, 2016 Posted by Andy McCarron
Financial trading under attack from UK FCA

Playtech escaped the worst of the carnage affecting the shares of the listed consumer-facing financial trading operators last week despite its exposure to the sector via its acquired TradeFX business.

IG Group, CMC Markets and Plus 500 all suffered large double-digit falls last week after the UK’s Financial Conduct Authority (FCA) announced proposals to limit the leverage available of products such as Contracts for Difference (CFDs) and forex trading. The watchdog also said it was looking into whether there was a case for offering binary options at all.

Playtech’s exposure to the financial trading sector comes through the €208m TradeFX acquisition in April last year. According to the half-year results the financials division was already struggling after having undergone a reorganisation under Playtech’s ownership with revenues to June down a total of 27.5% on the first half 2015 to €31.3m.

Anticipating the regulatory queasiness regarding binary options, Playtech said that the downturn in revenues was partly down to a move away from this product as well as the cessation of relationships with introductory brokers and what it termed as “fundamental changes in onboarding processes.”

Having gone through the process of reorganisation, Playtech said at the time of its results in August that the business had shown signs of positive trading in the months since the end of June and it reiterated last week that it didn’t believe the FCA’s proposals would have a “material impact”.

This view was backed up by analysts at Morgan Stanley who suggested the company’s financials division was “well positioned” to cope with the new regulatory climate both in the UK and in Cyprus where the regulator similarly introduced leverage limits at the end of November, alongside new rules banning the use of bonuses and sign-up incentives.

The good news for Playtech is that things could have been much worse given the abortive takeover of Plus 500 which the company pulled in November last year. Playtech still owns 10 percent of the company, the value of which fell by £16m last week.

One effect of the reorganisation and the resulting drop off in revenues is that Playtech is now unlikely to be paying the €138m earnout outstanding on the TradeFX deal. The Morgan Stanley team made the point that the earnout is based on a multiple of eight times the old TradeFX’s EBITDA for 2017, less the initial €208m consideration.

The hurdle rate for any earnout to be paid is €26m in EBITDA. However, the Morgan Stanley team point out that its forecast for the entire financials division for 2017 is €29m and given that includes a €9m contribution from the recent financial brokerage platform acquisition CFH, it means that no earnout is likely.

Totally Gaming says: The financial trading sector is in something of a mess. The FCA is after it, the Cypriot financial watchdog is similarly ill-disposed and most recently the German regulator BaFIN made noises about CFDs that further rattled the sector. Playtech can count itself lucky that it didn’t go through with the Plus 500 deal this time last year, but as the calculations on the earnout suggest, the value of the financials division is not what it was.


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