As Playtech deal is canned by authorities, why did the FCA throw a spanner in the works of proposed Plus500 acquisition? Analysis

Britain’s financial markets regulator, the Financial Conduct Authority (FCA) has a longstanding predilection for not becoming overly involved in the affairs of large non-bank financial services companies.

Indeed, the FCA rarely conducts inspections on any established company, instead preferring to take a reactive approach. For example, should a complaint arise, the FCA usually sends that complaint to the company in question with a covering letter explaining what has been alleged, and giving the firm two options, the first being to settle with a 30% discount and have the file closed, the other being to dispute it.

The first option is always taken, as depicted by official research figures from British law firm Freshfields that showed that of all FCA complaints between 2010 and 2014, 97% were settled without even so much as an inspection. It is a very different methodology to the real regulatory authorities of North America who are very active indeed with regard to surveillance of their members.

This raises a very interesting question. This morning, it was reported by the London Stock Exchange that the FCA has effectively caused the veto of the proposed deal between Plus500 Ltd (LON:PLUS) and Teddy Sagi’s London-based electronic gaming software company Playtech PLC (LON:PTEC). Why would they do that, and why was this activity specific to this deal?

Plus500 is widely understood to be a very efficient company, which mastered the digital model and kept its resource costs, operational expenses and client on boarding costs down to such a low level that the company rapidly rose in value, attaining a market capitalization of $1 billion post flotation on London Stock Exchange’s Alternative Investment Market.

The digital model has not been so easy to master for a vast number of companies which are very long established, and therefore when arriving in London, Plus500 was not only a new kid on the block, but a $1 billion dollar, super-efficient new kid on the block without the advantage of a traditional ‘old school tie’ relationship with the powers that be.

Today, the London Stock Exchange released the following update, confirming that proposals by Playtech to acquire Plus500 had been canned.

Whilst regulatory approval for the acquisition of Plus500 has already been received from the Cyprus Securities Exchange Commission, the Company has been in active dialogue with the Financial Conduct Authority (“FCA”) in relation to its proposed acquisition of Plus500, including in relation to certain concerns raised by the FCA which the Company considered could be resolved to the satisfaction of the FCA prior to 31 December 2015, being the effective long-stop date for the transaction to complete.

However, following an update from the FCA late in the afternoon of Friday 20 November 2015 and having considered its position over the weekend, the Board of Playtech is now of the view that the steps being proposed to address these concerns will not sufficiently satisfy the FCA to enable Playtech to obtain the FCA’s approval by 31 December 2015, and is therefore withdrawing its change of control application to the FCA.

Under the terms of the merger agreement with Plus500, Plus500 would have the right to terminate such agreement if completion does not occur by 31 December 2015. The Company has discussed with Plus500 the consequences of the recent developments with the FCA and has agreed to the termination of the merger agreement. Accordingly, the acquisition of Plus500 will not be proceeding as planned.

Playtech will not incur any financial penalties with respect to the termination of the acquisition of Plus500. Playtech has no immediate plans with respect to its existing 9.9% holding in Plus500.

Plus 500 has also today made a statement, which can be viewed by clicking here.

Why did the regulator put a stop to the deal? Mergers and acquisitions between much less well capitalized companies progress unhindered in Britain all the time with very little intervention from the regulator. Usually, the books are looked at by auditors, a value agreed, and then it proceeds according to the instructions of legal entities representing both sides, signed off by auditors, and has nothing to do with the regulator.

FinanceFeeds reported recently that having conducted extensive research, it had become apparent that some rival firms were less than keen on the thought of overseas competitors setting up business on their territory, and therefore implemented methods by which to cause such companies commercial harm, which led to the FCA’s instruction to Plus500 UK in the summer of this year to freeze all account activity.

According to a number of sources close to the matter, Plus500 UK’s restriction was initiated by a series of competing companies having close relationships with FCA officials, and in some cases recruiting former FCA officials to work in departments dedicated to researching what could be deemed as malpractice by competitors in order that they can use their channels and connections to converse with officials in order to put a metaphorical spanner in their works.

The basis for the FCA’s instruction to Plus500 UK was that the regulator had concerns about the company’s checks when onboarding new clients, especially relating to Anti-Money Laundering (AML) procedures.

By mid-June, following this action, Plus500’s valuation had declined to £459.6 million, almost half of the firm’s value just two weeks prior, rousing the interest of Teddy Sagi’s Playtech PLC (LON:PTEC) which entered into discussions with Plus500 with regard to acquisition, and thus today yet again the regulator has stepped in to halt proceedings.

An outright acquisition by Playtech would not only further strengthen Plus500’s position but in turn add another important strategic string to Playtech’s bow as the company has been successful in expanding its Eurpean operations considerably since its listing on the London Stock Exhange’s Alternative Investment Market in 2012. Had the deal proceeded, the two Israeli companies would have become even stronger, to the probably dismay of home-grown rivals.

It may well be of merit to consider which item has the greatest sway among London’s giants; an expanding multi-million dollar business empire, or a school tie emblazoned with the crest of an establishment which ensures one’s future. Engage received pronunciation accent “Tarquin, dear chap, see them awf will you?”