StoneX reports hedging losses on Gain Capital transaction

Rick Steves

The integration of Gain Capital took away StoneX’s management the triumph of a 15% RoE in Q4 2020, but added the retail FX business it was lacking.

Gain Capital's Peter Quick buys $280,000 of stock

StoneX Group, formerly known as INTL FCStone, has reported hedging losses relating to the sterling-based capital acquired in the acquisition of Gain Capital. This had the effect of reducing the company’s EPS, which resulted in failing to meet the return on equity goal of 15%.

The brokerage and financial services firm provides execution, risk management, and advisory services, market intelligence, and clearing services across multiple asset classes. The company’s FX ambitions led to the acquisition of retail broker Gain Capital for $6.00 per share, representing approximately $236 million in equity value, in an all-cash transaction.

The deal represented a 70% premium to the closing share price of GAIN’s shares on February 26, 2020 and a 60% premium to the volume-weighted average price of GAIN’s stock in the 30 trading days ending on February 26, 2020.

Sean M. O’Connor, Chief Executive Officer of StoneX, said: “Q1 was a solid start to the new fiscal year with all our segments showing growth in both operating revenues and segment income, despite generally lower trending volatility and significantly lower interest rates. We saw strong growth in customer volumes, new account activity, and customer float. We have made good progress on integrating Gain, including realizing cost synergies and are actively developing revenue synergy opportunities.

“The quarter included a few notable items, which in aggregate reduced our EPS by approximately $0.45 per diluted share, and without which we would have nearly achieved our goal of a 15% return on equity for the quarter. Specifically, we recorded hedging losses relating to the sterling-based capital acquired in the Gain transaction, which was offset with a credit to stockholders’ equity, and with respect to physical inventories we hold for short periods prior to delivery for sale, and we also recorded additional amortization relating to intangible assets acquired in the Gain transaction”, O’Connor added.

The presence of Gain Capital’s business in StoneX financial statement is notable. FX and CFD contracts led, by far, the operating revenues in the three months ending on 31 December 2020. From $4.6 million in Q4 2019, revenues jumped to $59.8 million in Q4 2020, which is a 1,200% change.

Going into detail, StoneX’s institutional business only had an increase in operating revenues by 9% from $4.6 million to $5 million in FX contracts. The real change was in its new retail operation, which came from zero to $54.8 million.

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