British interdealer brokers Tullett Prebon Plc (TLPR.L) and ICAP Plc (IAP.L) have agreed to merge their global voice broking businesses in a £1.11 billion ($1.68 billion) deal.
In a reverse takeover, Tullett is buying the global hybrid voice broking and information business of its much bigger peer to create the largest player in that sector, while ICAP will focus purely on electronic trading and post-trade services.
ICAP, one of the world’s largest interdealer brokers, was founded in the 1980s by its current CEO, British multi-millionaire former Conservative Treasurer Michael Spencer.
Spencer, worth an estimated £730 million, , according to The Independent, has been eyeing the deal between the interdealer brokers – who buy and sell bonds and derivatives for the big investment banks – for some time as brokers are squeezed by lower trading volumes amid tougher bank regulation.
“Today we announce a compelling opportunity to bring together two world class, client focused broking businesses, both with a proud heritage,” said Spencer. “By coming together they will benefit from improved scale, allowing for a significantly improved product suite and service for customers. Financial regulatory reform means that the global financial markets have profoundly changed and this Transaction means both companies will be better suited to meet the market’s changing needs and better serve our customers. This is an historic moment for both companies and the voice and hybrid broking industry. I have every confidence that this new structure will emerge as a great platform for success.”
“The transaction provides a unique opportunity to combine the complementary strengths of two leading global hybrid voice broking franchises to create the largest player in the industry, which will achieve significant cost synergies of at least £60 million,” said ICAP in a statement.
Interdealer brokers, which match buyers and sellers of currencies, bonds and other tradeable instruments, have been hit in recent years by regulation designed to rein in the riskier trading activities of their traditional investment bank clients.
Traditional telephone broking services have also faced sweeping reforms, as regulators push more derivatives trading onto electronic platforms to make the market more transparent.
“We continue to see voice as a difficult business, but expect the merged entity to have scale benefits,” said BofA Merrill Lynch analysts, according to Reuters.
ICAP’s shares rose almost %7 to rank among the top gainers on the FTSE-250 Midcap index, while Tullett’s stock fell more than 9 percent.
Markets have become more volatile this year, led by uncertainty around the timing of an interest rate move by the U.S. Federal Reserve as well as concerns over slowing Chinese growth, low commodity prices and geopolitical instability.
Kicking off consolidation among interdealer brokers this year, BGC Partners acquired U.S. rival GFI Group after a protracted takeover battle.
After the deal, ICAP will hold %19.9 and its shareholders %36.1 of a Tullett enlarged by the issue of new shares. Tullett’s existing shareholders will own %44 of the new company.
Tullett will continue under the name TPICAP, employing around 3,000 brokers and 2,000 support staff, Chief Executive John Phizackerley said on a call with reporters.
Tullett expects to save at least £60 million by eliminating duplicated management and support costs, with more savings expected over time. It will take on the ICAP unit’s gross debt of £330 million.
The slimmed-down ICAP will retain the electronic platforms EBS and BrokerTec, the transaction processing business Traiana and post-trade risk mitigation businesses TriOptima and Reset.
By shedding its voice broking business, the new ICAP will be permitted to carry less capital on its books, thus raising its potential to make acquisitions and invest in start-ups, Spencer, who will remain chief executive, said on the call.
“This capital issue effectively meant that, at some point, the split of ICAP into an electronic post-trade business on one side and voice broking business on the other was an inevitability,” he said, according to Reuters.
Sources said a standalone Icap would gain a higher rating from the City and potentially even attract bid interest from the likes of the LSE. A second source said the combination could generate at least £70 million in back office savings “for starters”.