FXCM Sells Japan and Hong Kong Units, why it is a bad deal?!

FXCM Sells FXCM Japan and FXCM Honk Kong, why it is a bad deal?!AtoZForex.com Lagos — $300 Million loan from Leucadia deal might probably be among the worst decisions FXCM has ever made and it might actually become as the beginning of the end for FXCM.

With the mindset of advancing ahead, the management of FXCM Inc. have revealed crucial details on it’s future plans. Alongside, the firm has released their long-awaited earnings report and trade volume figures. The focal point of the report is the proposed restructuring of the financial entity, which is scheduled to take place in the following months to come. FXCM’s CEO, Mr. Drew Niv, dropped new information about the anticipated sale of its subsidiaries; FXCM Japan and FXCM Hong Kong.

Round 1: FXCM Sells Japan and Hong Kong subsidiaries. Details below and why it is a bad deal!

In the aftermath of the historic Swiss franc event, the company has revised its total losses incurred to $279 million. As shocking as it is, this is $54 million more than the originally announced $225 million loss, which is almost equal to the $300 million loan received from Leucadia National.

The main aim of the proposed restructuring has the purpose to significantly reduce its debt obligations through offloading non-core assets, as explained by the company’s CEO Drew Niv. Notwithstanding, it was evident that there were anticipations going around, pointing out FXCM to sell off subsidiaries in Hong Kong and Japan. Considering, the totaling amount owed to Leucadia National is in the region of $300 million. The signed loan agreement displays an initial interest rate of 10%, with an additional 1.5% increase, on top of every quarter.

Justifying the decision over the potential sale of the Asian offices in Japan and Hong Kong, Mr. Drew Niv commented the following; “We have decided to exit the Japanese and Hong Kong retail markets selling our locally regulated subsidiary in each country. The sales will not only generate meaningful proceeds, but will also liberate over $50 million of cash which currently resides in these two entities.”“We have multiple bids for each subsidiary and are seeing significant competition for these properties. We are in active discussions to select the best bid and move towards closing in the near future,” he explained.

A few other points worthy of note from the reports include:

  • The aggregate earnings before interest, tax, depreciation and amortization from the Japanese business last year was $6 million on a non-GAAP basis.
  • FXCM can expect to put $40 and $50 million price tag on its Japanese subsidiary, considering how lucrative the region is and the expansion appetite of many companies to acquire business in the region.
  • About 2.5 million in non-GAAP adjusted EBITDA was generated fro the Hong Kong business in 2014.
  • Retail revenues per million was reported at $69 for the last quarter in 2014.
  • In order to improve its profitability the company has announced that they will be returning the dealing desk model for clients with equity below $20,000, to be run concurrently with the agency model (HINT HINT HINT)

According to the CEO, Mr. Drew Niv, the firm will launch hybrid desk models (weren’t they already hybrid?) for the minor retail FX accounts for the purpose of accelerating the growth in their core business segments. Explanatory, these specified accounts fall in the category of $20,000 or less in deposits. Although the quantity of these accounts may be large in terms of numbers, this category only represents less than half of FXCM’s trading volume (what about the net book value?). The financial entity aims to balance between the execution of agency model and dealing desk, for the aim to maximise their RPM. Additionally, will the broker provide a choice to their clients of greater leverage options with dealing desk execution as well as agency execution along lower leverage.

Notably the release of FXCM’s report has taken an affect on the market, as the shares of the company went up about 15% in pre-market trading on the New York Stock Exchange to $2.48.

How can potential buyers catch a cheap bargain out of FXCM’s financial trouble?

This probably is the main question investors have at this moment. Given the current financial situation of FXCM, we can conclude that the decision to sell the Japanese and Honk Kong subsidiaries did not come from FXCM management only, but it was enforced by Leucadia as the company’s financial future does not appear to be positive.

If the deal for these subsidiaries does not end up positively, most likely investors will manage to get acquire these subsidiaries at a discounted price may the company end up insolvent by the end of 2015 or early 2016. So why to pay more if you can pay much less in a couple of months. Never the less, this is just my opinion though.

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