TP ICAP confirms advanced discussions for proposed acquisition of Liquidnet

TP ICAP PLC (LON:TCAP) today announces that it is in advanced discussions relating to the proposed acquisition of the entire issued share capital of technology-driven, global electronic trading network Liquidnet Holdings, Inc. The total consideration is between US$600 million and US$700 million comprising approximately US$550 million upfront, deferred non-contingent consideration of US$50 millioon and an earn-out of up to US$100 million.

The Board of TP ICAP notes that Liquidnet has been a trusted partner to buyside clients for two decades, building up comprehensive workflow connectivity to a network of more than 1,000 buyside institutions1. Liquidnet has already proven its ability to leverage its network and relationships to enter new market segments.

There are also addressable growth opportunities, arising from the combined strengths of Liquidnet and TP ICAP.

For instance, D2C electronic Credit trading has been growing rapidly. Liquidnet has already built an impressive global network of more than 500 buyside institutions, with execution protocols focussed mainly on large-size client-to-client trading of corporate bonds. TP ICAP expects to use its Credit market expertise, its established relationships with the global dealer community, and Liquidnet’s existing capabilities, to expand the Liquidnet offering to include a range of D2C tools and protocols. In a growing market segment, TP ICAP expects the Enlarged Group to present a highly attractive offering to market participants.

In addition, in the Rates market, over-the-counter trading represents an increasing share of interest rate derivative trading, and the rate of electronification in the D2C segment is growing particularly rapidly. TP ICAP believes it can create a powerful competitor in the growing D2C electronic trading arena.

Also, Liquidnet’s Investment Analytics team and artificial intelligence and machine-learning tools are expected to complement and enhance TP ICAP’s product development and service capabilities. TP ICAP’s global sales team expects to present useful tools and products (such as the recently launched Bond Evaluated Pricing service) to the Liquidnet client base, accelerating penetration of the buyside market for data and analytics.

The Potential Acquisition would be expected to transform TP ICAP’s revenue growth profile, with almost half of the Enlarged Group’s revenue coming from higher-growth businesses and the Enlarged Group’s revenue growth profile expected to increase from low single digit to mid-single digit over the medium-term. Liquidnet would also be expected to contribute to a c.300bps improvement in underlying operating margin, leading the Enlarged Group to a 20%+ operating margin over the medium-term.

In order to achieve this margin improvement, TP ICAP expects a c.£25-30m incremental investment spend on Liquidnet in the 12-24 months post completion of the Potential Acquisition (“Completion”). Further, based on TP ICAP’s closing share price on the day prior to this announcement3, the Potential Acquisition is expected to be broadly earnings neutral in Year 2, and meaningfully accretive in Year 3.

TP ICAP plans to fund the potential acquisition via US$100 million in cash to be paid on completion, to be funded using TP ICAP’s existing debt facilities, plus approximately US$450 million in cash, to be funded by way of:

• a. An initial 19.9% cashbox placing on announcement of the entry into the Potential Acquisition, to be paid to Liquidnet stockholders on Completion; and
• b. A further non-pre-emptive placing closer to or shortly after Completion, but with the amount payable as consideration to be adjusted for the performance of TP ICAP’s shares between announcement and Completion, to be paid shortly after Completion;

There will also be US$50 million of senior unsecured loan notes issued on Completion to certain stockholders in Liquidnet, repayable in cash on the third anniversary of Completion, as well as an earn-out of up to a maximum of US$100m in cash, linked to the cumulative revenues generated solely by Liquidnet’s Equities business in the three years ending 31 December 2023.

The Potential Acquisition would be conditional upon, inter alia, the approval of TP ICAP shareholders, completion of the previously announced Redomiciliation and regulatory clearances, as well as other customary conditions.

Let’s recall that, in December 2019, TP ICAP announced its intention to reorganise the Group’s international corporate structure by the introduction of a new holding company in Jersey by means of a Court-approved scheme of arrangement. The Redomiciliation is expected to complete in he first quarter of 2021.