StoneX Group Inc. (SNEX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to INTL-GAIN update conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would like to hand the conference over to your speaker today, Sean O'Connor, CEO, INTL FCStone. Please go ahead, sir.

Hi, good morning, everyone. Welcome to our call to discuss the acquisition of GAIN Capital Holdings. Joining me on the call are -- is Glenn Stevens, the CEO of GAIN, and he will speak in just a second. We'll discuss the details of this deal in a moment, but just want to tell you that we're very excited about this merger. We think it works for us strategically on a number of levels. We had a new digital platform to increase transaction volume and expand product distribution of our global financial services network. We grow our client footprint, and we increase our client float, and we add a significant new retail client segment. This also brings to us technical and marketing expertise to accelerate the digitization and integration of our client platforms from electronic trading to analytical tools to market intelligence. The deal also works for us financially. It is priced at a small premium to against tangible book value. It is accretive to earnings and to return-on-equity, which is one of our primary performance metrics. Before we get going, I would just like to turn it over to Glenn Stevens for his comments. Glenn?

Thanks, Sean. I would absolutely echo the excitement part of your sentiments. I think myself and our team are really looking forward to leveraging all the capabilities and infrastructure that INTL FCStone has put into place over the years. And GAIN was founded on the idea of being customer-focused and customer-first, and I think that dovetails really well and is consistent with what you've instilled in your team over the years. So to me, it's a complementary opportunity. And as you said, there's all kinds of ways that we'll be able to work within your ecosystem and just be a stronger offering and a stronger choice for our customers.

Okay. Thanks, Glenn. So why don't we head into our deck? And if you're following along, I will skip by the disclaimer. I assume everyone has read that. So if we can get to the transaction summary. Just to run through this, we have agreed to acquire GAIN for $6 a share in cash or approximately $236 million for the equity. That represents about a 12% premium to the tangible book value on a diluted basis as at the end of GAIN's financial year. That's end of December '19. We will also be taking out the $92 million of convertible notes due in 2022. Those will be put to us at closing. And prior to closing, GAIN will repay the $60 million convertible note outstanding, and they will do that from cash on hand prior to us closing the transaction. In terms of the financing, we've received a commitment from Jefferies to provide the acquisition funding for this transaction. We are -- we have a commitment for $350 million in senior secured notes that we will issue. The pro forma leverage on a merged basis on a trailing 12-month basis will be 3.1x the credit EBITDA. We are envisaging that once we merge these 2 businesses, we will be able to release around $100 million in capital, and we will use that to pay down leverage. In terms of the leadership team, I will remain in my position as CEO of the company, but we would very much like Glenn Stevens to join. We very much like the team over at GAIN. We think they're a good match with us culturally and how they've gone about their business. Glenn is actually the founder of GAIN. It's his baby. And I think we all agree that, together, we can take this business to the next level. The expected close of the transaction is mid-2020. This is subject to approval by the GAIN stockholders as well as regulatory approvals in various jurisdictions and customary closing conditions. We have received the commitment from some of GAIN's shareholders to vote in favor of this transaction. There are probably some of you on the call who are not familiar with INTL side of the business, so maybe I can just spend a little bit of time going through that and telling you a little bit about us. So this business was started about 13 years ago by myself. It's effectively a start-up. We have built the business, both organically and through acquisitions. The largest acquisition we did in 2009 was that of FCStone. We are a client-focused business. And what we have built over time is a financial platform that connects clients to markets. I think we have a unique business model. We are probably the only midsized company now that is a clearing and execution member of 46 derivative exchanges around the world. We can take our customers to pretty much any securities market in the world. We trade every foreign exchange market in the world. We are a broker dealer. We are a swap dealer. So we can take our clients to any financial venue to help them make their business better. In terms of our clients, and I'll come on to the grouping and segment analysis, we serve commercial clients. These would be businesses looking to hedge risks. So they want to access the financial markets to take risk out of their production process, make their business less volatile and more viable. We believe we have a great tool kit for those customers around the world. We also deal with institutional investors. These would be buy-side institutions from the very largest in the world all the way down to small hedge funds. These are obviously people looking to put money to work and want to access the markets to do that. We also have a customer base in professional traders, who are active traders in the market, either on the exchanges or in foreign exchange or in equities. In this area, we have quite a good foot -- good overlap with the GAIN business. And we also deal with a lot of banks and financial institutions. We have a lot of small broker dealers and introducing brokers who effectively are aggregating retail flow for us. Obviously, now with the GAIN acquisition, we have a digital platform that can facilitate that flow better. So that's sort of the background to our business. We are also unique in terms of we have bundled our service in the sense that we provide both execution, but we also do the hard stuff. We do the clearing and custody side of the business. That's become an increasingly consolidated market, requires real capital and infrastructure. We think it gives us a better relationship with our clients and more viable long-term relationship. And just very few people are now able to clear all of the asset classes and markets that we do. In terms of our business, if you think about us as a financial platform doing the things that I've just mentioned, the way we monetize our business is pretty simple. We want traffic over our financial network. That generates transactional revenues for us, either in the forms of commissions or spreads. We have a very scalable platform now to all of these markets, and we are looking for ways to gather more flow across that network. And clearly, the GAIN transaction helps us with that. In addition, because we are clearer, we end up with client balances in our system, either through the clearing or the custody of assets. GAIN brings to us $1 billion roughly of customer float. We also monetize assets in other ways. We have securities lending. We have margin accounts in our system and so on. So there are lots of ways to monetize assets. Just the big numbers. We're about just over 2,000 people headquartered out of New York. We have offices. We have offices. We have 44 offices around the world, I think, in 11 countries. Our client count at the moment is roughly 30,000 commercial, institutional-type accounts, and we have over 125,000 retail accounts in our system. For the most part, those retail accounts have come to us through introducing brokers, but we also have our own independent retail platform that we acquired a couple of years ago. Looking at the numbers, we are coming off of 2 successive record years financially in the last 2 years. We've just reached $1 billion in operating revenue. Our net income was $83 million, and we -- our adjusted net income, $74 million. We have roughly $620 million of equity in our business. We set a target return, our primary financial metric, at 15% ROE. We are just slightly below that on a trailing 12-month basis. Prior to the -- for our year-end to September, we actually exceeded that target. And you can see our earnings per share, $3.36. So maybe we could move on to the next slide. Putting all of that into our segments, we have 5 segments at the moment. And I think those 5 segments really consolidate down into 2 basic core customer segments, plus our payments business. And you can see that in the bottom block there. So if you look at our commercial hedging and physical commodities business, this is really the business where we are serving customers that are looking to hedge their risk. We think we have the best toolbox in the business to help them do that. We cover every market, every derivative market our customers need to go to. We cover every product they want to hedge. We also have a -- an OTC swaps capability. So we are able to customize products for our customers. And we are also able to help customers with physical. And indeed, if they want to embed some of their price protection into the physical side of their contracts, we are able to help them with that. As you guys know, GAIN has an FCM. And certainly, the top third part of that business is directly aligned with what we're doing. It is focused on the ag's customers. So that is a straight and easy add for us in a highly complementary business. On the far-right side, you will see basically our securities and what we call care in execution services. That's really focused on institutional accounts. Just to finish up on the GAIN FCM side of the business, they also -- the other part of their FCM is focused on both IBs and professional traders. That's a straight overlap with what we do. So that is a complementary business that's easy for us to integrate. Dealing more generally with those 2 segments. This is where we are really dealing with either professional traders, hedge funds, institutions or buy-side accounts. We are -- these are people who are looking to either trade in the markets, speculate in the markets or invest in the markets, either for themselves or their clients. We provide them a 1 point of access to almost every market they want to trade. And if they want to hedge through the derivative markets as well as in investing or trading in the cash securities market, we are able to bundle that for them. So that's the sort of 2 outer parts of that slide. The middle part of that slide is our payments business. This is where we started off providing foreign exchange execution in all the non-G20 currencies. This has developed into a -- almost a fintech business for us. We discovered that execution in those markets was very difficult and not very transparent to people, and that we could provide a tremendous value to customers who needed to get funds into these markets, whether they be corporations, charities, NGOs or whether there were banks trying to get the best execution for their customers. So that business has grown tremendously. We now account all the major banks in the world. And certainly, the top 15 major banks in the world are customers of ours, as is almost every NGO and charity and a number of large Fortune 500 companies. They use us to access these markets efficiently. That business, we get a lot of people very interested in that business because of its fintech nature. And it has scaled very fast for us, is a pretty unique property. But at its core, it's a foreign exchange business. We are providing a better foreign exchange execution than even the banks can. So that is a quick overview for those of you who are not familiar with FCStone side of the business. Moving on, and I think we've covered a lot of these, we see ourselves as being that financial platform that can connect customers to all the markets. I think we've pretty much built that platform. I mean, at some level, it's never-ending because you always want to add new venues for your customers. We have dealt with the complexity of regulation in terms of being able to provide all of these different products in all of these different jurisdictions. And we are able to now offer integrated execution and clearing. There's no one in the midsize space that can do what we do. The -- obviously, the bulge bracket banks can do this, but we see us as being the sort of early and unique party in the midsize space. So getting on to our key strategic objectives. What we really want to do is make sure we keep making our financial platform better for our clients by adding new capabilities, new markets, new liquidity sources. And ultimately, what we want to do is increase the traffic over our network and increase the client balances that we have in our business because that's what generates our revenue. So how we want to do that is we are constantly looking to find new client segments that want access to our financial network. We want to push that out into new geographies. And part of that is to make sure that we are creating compelling on-ramps to allow customers to do that in a very engaging way. So we've got to make sure that we provide an easy way for customers to access all these markets, and we've got to make sure from our point of view that it is cost-effective. So one of the things we are doing is increasingly digitizing our networks to make it from a client perspective, get better satisfaction and engagement. It allows more easy cross-selling and for clients to, in one place, access all we have to offer. And indeed, GAIN provides for us a part of this digital platform that we need for a new customer base, which is really the retail side. We have built our business, as I said, both organically from kind of humble beginnings as well as through acquisitions. We are -- I think done well through our acquisitions. It's really helped us expand quicker than we would have organically. We have a couple of basic screens when we look at acquisitions. We want to make sure that our acquisitions are either bringing new capabilities or new products to our financial platform and enhancing the value of the platform itself and/or bringing a new customer base and new traffic over our platform. And I think in this instance, GAIN fits all of those. We are very conservative in terms of making sure that when we enter into transactions, we do them at a price that provides us a margin of safety. And we also want to make sure we have very short payback periods. We don't ever pay a lot of goodwill. And we want to make sure these transactions are accretive quickly to our shareholders. So I'm going to stop there. So hopefully, that was helpful to some of you who may be not familiar with us. And I'd like to hand off to Glenn. He obviously knows GAIN better than anyone, and it's his baby. So Glenn, if you want to take us through the next couple of slides.

Thanks, Sean. I think it's so indicative of the potential positive opportunity that's being presented here, perspective that I can essentially repurpose so much of what you said in terms of the culture you've built over time and your focus being customer-first and, also, this concept of trying to develop more touch points with customers across the board. A lot of that, if not all of it, can be echoed quite accurately the way we've tried to shape GAIN over the last 20 years as well. As kind of a microcosm version, the missing piece, if you will, I think, was so much of the underpinning and the foundational expertise and the clearing and the routing that, obviously, you guys have developed over time. And so to me, it's so complementary from that perspective. So it's kind of a quick history and a quick perspective being that this is a call where both companies might have stakeholders that are familiar with their respective shops. Just as a background. So GAIN was founded in '99 with the intention of providing traders with low-cost access to foreign exchange markets. So essentially, we were a single product on a single platform in a single market, and then from there, tried to replicate some of that success across different markets, across different customers, across different products and across different platforms, but primarily staying in the retail space. And then over time, through some acquisitions and through some developments in other parts of the world and also some other services, we folded in things like our futures business as well, always with the eye on the prize to try to broaden our relationship with our retail customers. And I think, again, not dissimilar at all for what Sean was providing as an overview, GAIN was going along the same lines to say, "Hey, what else can we do to be more valuable to our customers, so that, that relationship is a lucrative one, but also a rewarding one for the customer?" And a lot of that had to do with expanding our technology, doing a lot of proprietary work to be able to do things in real-time, it's a 24-hour market for foreign exchange, in particular, and then start to fold in other markets as they made sense. And I think that's where it goes back to being so exciting here because for all these other access points, the reality is that our customers often have a very broad appetite for different markets, particularly as different markets pick up and trading opportunities and volatility and things that happen in the world, we had a relatively limited set of products, and I think we executed really well on that. However, being able to tap into all this extra capability that Sean was going through in terms of payments, in terms of some bespoke derivative products, in terms of risk management, in terms of clearing, SEC lending, these are all services that our customers have an appetite for and use. The problem is they're doing that with other companies today because GAIN doesn't have it as part of their platform. When we're able to bring to our 130,000 customers all these -- this new capability, not to mention new customers that we can bring in because we've developed a lot of expertise over time in onboarding and being able to, at a low cost, serve customers in a very effective fashion, whether it's on chat or in e-mail or on phone or in different languages or in different time zones, that capability becomes easier to leverage when you have more ways to serve customers. So I think if you stick with that and you look how we're set up with a retail segment and a futures segment as well, it's about being customer-focused. We have some kind of rough numbers there on the slide about our net revenue mix. And you can see that it's primarily an FX-driven retail business. There is nonFX part of it as well that we're hoping to expand and continue to push, particularly, outside the U.S. market. And then in terms of client assets and such, as Sean mentioned as well, we're running just under $1 billion in client assets. In terms of the scale of the business, as a reference point, on the next slide, we put financials -- some basic financials for 2019 with $194 million in retail net revenue and $40 million of futures revenue on the calendar. But ultimately, I think that, that year, for example, was light for us. And it was in an environment of low volatility, an environment where once you have a limited set of products for your existing and prospective customers, makes it harder when you're trying to develop this relationship with them, and other markets are moving. And whether it's equities or crypto or whatever it might be, you can have the platform and you can have your customer relationships of the product, the infrastructure and the underpinning because it's an important part of it. So to me, being able to tap into, and I use the word, ecosystem, because I think that's exactly what Sean and his team have built, an ecosystem where there's different complementary businesses. From a customer's perspective, they can deal with one entity and be able to be served on several levels. So as their tastes and wants and needs change, we're able to adapt to that much better now being part of INTL instead of being independent. So look, the industrial logic clearly makes sense as well. When you look at a lot of the opportunities for added synergies and cost savings and efficiencies, globally, that's laid out. And I think both shops had a history of being able to assimilate a new company, try to keep the best, try to exit the worst and end up in a better place. And I think, also, being conscious of creating value for shareholders and creating value for stakeholders across the board is part of our culture. And I don't want that to go unsaid, the cultural part in being able to deal with a lot of people. On what Sean and his team, I think, was reflective with us. It wasn't contentious. I mean, of course, these things take a lot of effort and take a lot of input, but I think it was pretty clear from early days and even progressing through that there was a lot of alignment that way. And that cuts down a lot of the potential pitfalls that you can come across when you're trying to assimilate these deals. Not to mention, I think that with INTL having a history of acquisitions, as GAIN has as well, you don't get left with this odd culture shock, where somebody says, "I've never been through this before." Because people on both sides have. And I think that's very helpful as well in making sure that value gets preserved, customer disruptions are minimized or eliminated. And also, we have a lot of plans in place to be able to have a very smooth and successful transition. So a lot of that you can't make up, and you can't do it on the fly. It has to happen over time. And I think both shops have exhibited that and done that. So that's why we're really excited about this. In terms of just the last piece, in terms of our business, as I said, we bring to the table a retail-focused expertise, a digitized platform, both mobile and desktop. It's multiproduct. It's multilingual, and it's -- and it serves a lot of different customers in a lot of different places. So we're looking forward to taking the next step going from there. I think with that, Sean has some transaction rationale maybe you want to walk through, and then we can get to a little more of the detail.

Fantastic. Thanks, Glenn. So just to summarize on the next page headed, Transaction Rationale. I think we've covered some of this, but the most obvious thing is it increases our net operating revenue or the merged entity by 30%. We obviously increased our customer balances by 4 million -- 4 -- by $1 billion to $4 billion. I think one of the interesting things here is GAIN, given that they have an overweight in foreign exchange and are dependent a little bit on the cycles of that business, have had some volatility in their earnings. And I think they will now be assimilated into a broader portfolio of products. I mean, a lot of our single products exhibit similar volatilities in their revenue profile. But I think putting these together creates a better portfolio effects on the revenues. And indeed, as I'll show you later, we back tested that, and it significantly reduces, in fact, our stand-alone volatility. So a sort of a complementary add there. I think the biggest thing, though, for -- in terms of the industrial logic here, and that's what it's really about, it's all about the customers, and if we build a great customer business, everything else will sort of take care of itself, is really what Glenn was saying, is our hope and ambition here is we can provide Glenn and his team and their customers with more capabilities and products to really broaden their offering, so that they can provide a comprehensive service to their clients. We are a broker dealer. We are a clearer. I mean, one of the reasons, I think, that GAIN didn't go down the route in the U.S. of trying to set up an equity business is if you're not a clearer, you don't get a lot of economics out of using someone else. And same thing on the futures side. The economics are largely now driven by the clearers. And we are a clearer. So for us, it's very easy for us to add both futures and equity trading capability in the U.S. to GAIN's customers. We have payments capabilities. We have a lot of capabilities that I think we can add to the GAIN business. And I think our hope and desire is, by doing that, we will have a better and more attractive offering to the customers. That should allow us to grow our customers and potentially go for higher quality customers up the chain. And that we will make more from each customer because we have a broadened product offering. So we want to go for wallet share, and we want to go for market share. And I think with the tools we have, I think, the GAIN team will be very successful in doing that. I think we have a team...

Sean, if I may just jump in, I just wanted to highlight and kind of emphasize exactly what you were just saying. There was a myriad of times over the recent past, where we absolutely addressed some of these markets. And you look at some of the companies out there that have been successful, particularly in kind of the active trader markets. So it's not, as you said, all the way down market small retail, not necessarily all the way up market for institutional or larger professionals. That sweet spot can only be addressed successfully if you can -- that active trader, that kind of near professional, if you will, can only be addressed successfully if you have the full suite of capabilities, products and capabilities. So as you said, if you offer them equities and you offer them futures, but you can't do the routing and the clearing and the custody behind it, then your margins are so thin that it makes it a bigger hurdle to get over. You put these 2 together and you say, "Gee, we have these customers and we have this access and we have this ability to deliver more product to them, and with all the underpinnings, all of a sudden, we're actually fighting in a bigger arena." And if you consider, you look at the assets we're bringing over at nearly $1 billion, okay, in the bigger scheme of things, that's not a huge number. But when you recalibrate it such that, that is $1 billion focused on a relatively narrow set of products and services, that tells you that the potential relationship with those customers can be much broader. So I think that, that -- those are leverage points that maybe don't pop up off the page. That makes our efforts rewarding to say, "Let's get after it." Because that's really where the opportunity is being able to deepen and broaden the relationship with these active customers because now it makes sense. Because before, of course, we wanted to, but it didn't make sense. But like you said, that hurdle is much lower now when you have all these capabilities behind it. Sorry, I just wanted to add that.

Great. Thanks, Glenn. I think that was sort of the core of the rationale for us getting together on this. I think another key piece of the sort of industrial logic here is GAIN does trade a lot of things other than just foreign exchange. I mean, they are active in the equity markets. They trade commodities. They have an FCM. They have ag customers. And as I mentioned upfront in my comments, and we'll get to it later, those are all a good match for us just from a client perspective. But I guess, the point I want to make as well is I think there is a lot of value we're going to extract from taking GAIN's current flows and combining them with ours. Because in many instances, we either have similar flows. We are sometimes a market maker in some of the products they have or we are the clearer. So for example, GAIN doesn't clear their own futures business, we will clear all those current clients. That's an additional margin we can extract from the existing GAIN business. GAIN trades equities. And we found that a significant portion of those equities, we are the market maker of here in the U.S., which means we can extract a spread that GAIN was passing up to some other market maker because we will now be able to execute those trades. On the foreign exchange side, we have a foreign exchange prime brokerage business. Ours is lower margin than theirs, but we do something like $2 billion a day in foreign exchange. When you combine those flows, you end up crossing more spreads. We combine prime brokerage arrangements. We end up lowering costs. So there's a lot of potential synergies in just combining the flows, crossing spreads or using our infrastructure to enhance margins on their current business. So I just want to make that point. Obviously, the other sort of part of the rationale is, as you've seen with GAIN's results, they had a pretty tough year last year. And if you looked at the slides, which I should have noticed when Glenn was presenting on GAIN, they did have a slide there which stacked up the sort of annual revenues as well as the CVIX. The CVIX is obviously the volatility index relating to currencies, which is the key driver for the biggest part of their business. That's at multi-decade lows right now. And that was certainly a big driver of the underperformance of GAIN, particularly in the first quarter of 2019. So what we believe is just through the straight cost synergies by putting these 2 companies together, we can take even the worst results that GAIN has produced in a long time in 2019 and we can make those results acceptable just through straight cost cuts, just eliminating the costs related to being a public company, putting some of the infrastructure together. We both have offices in the same place. So we've gone through that in some detail, and we'll touch on it. Straight away, we can take a pretty bad environment for GAIN, and we can turn that into an acceptably profitable result for us on a merged basis. Then, of course, all the things we've mentioned, the kind of synergies on the flows, building out GAIN's client base, and, indeed, any increase in the volatility are kind of all upside opportunities for us. So it seemed to us that, that made a lot of sense.

Yes.

And as -- and I think, as Glenn has mentioned, sort of one other piece of the industrial logic for us is they bring a lot of assets to us, which enhanced our desire to become more of a digital business. They've been in the digital game because they have to. I mean, if you want to participate in the retail trading platform space, you better be efficient and digital. And they've done that. And I think they have some skills and some technology that will help us deploy into other areas of our business to accelerate that. So we're certainly picking up a lot of good talents and experience and assets that can help us improve our business. So Glenn, did you want to say something?

I was just going to add to your point about what we consider kind of an opportunity to regress to more normal levels in terms of activities and market conditions. As you pointed out on the slide, in terms of where the CVIX was and VIX in general, we recently published our January activity levels. And even when people just look around and see markets moving a bit from where they were, we went from kind of like a 6.5 yards or a $6.5 billion per day volume in Q4 of '18 to $7.3 billion per day in January. And even modest upticks clearly changed the profile or can change the profile. And so we've been -- we have been saying even on our own calls, look, we don't expect, as you rightfully referenced, multi-decades low volatility to stay forever. We're not saying that we're going back to frothy markets. What we're saying is that if you look at the long term, over time, we're clearly below even modest to normal levels. And so as we start to see some return to that, I think you couple that with some of the strides we've, at least, initiated on the efficiency base in terms of lowering our costs. And we expect to do that even more effectively, as you mentioned, with the opportunity inside your network. That double whammy of getting some regression to mean or reversion to mean conditions, normal conditions, coupled with a lower cost base clearly has a positive effect. Even before you get on to the opportunities that we talked about earlier with more services to more customers and such. So yes, I just wanted to add that part about saying that we've already seen some green shoots even in January, when we put out our monthly metrics.

Thanks, Glenn. So I'm conscious of time here, so we'll try to move on. We -- as you can tell, we're both pretty excited about this. So moving on to the pro forma revenue, the next slide. I think we've covered most of this, but just sort of putting it down in metrics, I'll take you through a more detailed buildup of the pro forma results here. But you can see our business in GAIN's stacked up together. And if you look on the far right, you can see the combined, what that looks like. You'll see the little on the top left of that kind of doughnut, the 21%, that's really GAIN's retail business there. And you can see, we haven't extended that kind of retail arc over all of it because as I've indicated to you in our previous comments, there are some of those customers that really overlap quite nicely with our institutional client base, certainly, the ag's, futures customers. And a sort of professional trader element of their business is a good overlap with what we're doing on our side. So there is certainly a kind of a little overlap between those customer groupings. If you look, I guess, at EBITDA, you can see our EBITDA for the trailing 12 months. You can see the projections we have there, and we'll go through those. And you can see how accretive this is to EBITDA. Near and dear to my heart is the one down at the bottom. Fundamentally, we want to keep compounding our capital. Warren Buffett 101 is our kind of north star here at INTL. We believe if we do that, we'll become a bigger company. We'll become a more valuable company. Our target is 15%. And if we do this right, on a fully synergized year-2 basis, this could get us to above 20%. And I don't think there's a financial business out there who is in the sort of clearing and execution side of the business that is able to achieve those kind of returns. Moving on to the next slide. I think we have touched on a lot of this, but we just wanted to sort of set it out graphically that the -- probably the bigger overlap with the clients and the products than it ma first appear. I'm not going to go through all of this, but, for example, you can see, and I mentioned before, if you take the top-left box, which is really the sort of commercial clients and the listed derivatives, that's obviously a big franchise for us. This is where we deal with commercial clients and hedge their risks. But obviously, GAIN has a small piece of that because they have the top third. We know top third. We bump into them. They are competitors of ours. So that's a nice complementary business. If you go down sort of 3 blocks below that, you can see professional traders under listed derivatives. We have a very big business in executing and clearing for professional traders on the exchanges. It's in our CES segment. We have a very big market share in this business. And through Daniels, GAIN has a very similar business. So that's a good overlap. If you go one to the right, and, again, I'm not going to go through them all, but if you look at professional traders and securities, the top section of GAIN's client base, particularly with City Index, they trade a lot of securities. They trade a lot of equities. They trade CFDs. I would -- we would term the top end of their customer base to be sort of in the professional trader kind of segments. And these are all instruments that we can clear. We market make some of them and we trade. So again, a nice overlap there. Obviously, on the pure retail side, we do end up with some retail business in our network. A lot of it comes through brokers and aggregators, introducing brokers and aggregators, but we do have some pure retail business. Not a lot. Obviously, GAIN strengthens us a lot in that bottom row, as you can see, with the light blue parts of the doughnut. So I'll leave that there. Happy to take any questions on that later. Glenn, do you want to deal with this next slide or me?

Yes, sure. I mean, I think we've covered a lot of it, Sean, to be honest. I mean, just in terms of -- I think the point really here is, as people are familiar with your business, get their arms around our business, then we wanted to make a comment. Just as I talked a little bit about 2019, we're on a calendar fiscal year, if you will. And so we just had some commentary built around, but the highlight there was just to show to how pretty much anomalous '19 was in terms of market conditions. We measure things on our volume. We measure things on our revenue capture, and those metrics drive what our top line and, hence, bottom line would look like. And '19, really, in many ways, stood out as a real oddball year and, to some degree, masks some of the progress that we made with products and with new customers, adding new customers, adding new markets across the board. It didn't manifest itself in results, which is what pays the bills. And you're right, Warren Buffett would maybe be patient, but would want to make sure you focus on that, which we are. And that was why I mentioned that, number one, that key client metrics continued to be strong throughout the year. And when some of the fruits of the labor start to show them -- show their benefits as we post the January metrics, I think that, that was -- those were all kind of up into the right as well. So I think, in general here, it really was just trying to highlight to say if you take a slightly broader perspective or pull the lens back, it sheds a little bit more reference point on what was clearly a soft '19 for us.

Okay. I would just like to draw your attention to the bottom chart there. I did discuss it earlier. So that's where we've overlaid GAIN's revenues on to ours. And we exhibited 18% quarterly volatility on a combined basis that gets reduced to 13%. So perversely or maybe logically, adding a another volatile product to a broader portfolio actually creates a better result. So that's kind of an interesting byproduct. Just running through the next slide, sources and uses of cash, I think we covered most of this on the user side. You can see the value of the equity, which is at $6 a share. The convertible we'll have to redeem and then some costs, some cash and then the $350 million of senior secured that Jefferies has committed to us. And then you can see, on a merged basis, what that does to holdco debt-to-EBITDA. I'd just like to mention, I mean, the credit people don't really think about it this way, but we have a pretty large holdco revolver and have significant flexible --well, not flexibility, undrawn capacity under that at the moment. It's not sufficient to consummate this transaction, but we certainly will have a lot of liquidity post this transaction and anticipate a very fast deleveraging, both through utilizing our own cash on hand. And also, as we've indicated, we believe we can extract some capital out of the business once we merge the entities. So running on to the next slide, significant expense synergies. We've gone through this in a lot of detail. We like to be very conservative in these estimates. This is sort of what we've come up with. In large part, this is just very simply taking up very obvious public company costs. It's also looking at areas around the edges where we can consolidate infrastructure. So we don't -- this is not predicated on a massive decrease in personnel. We need the GAIN people. I think they're additive to what we do. In fact, a lot of them, I think, bring a skill set we need, but there's just some very obvious things you can do when you rationalize the business like this. If you look at the cost -- the capital synergies on the next page, we are sitting with significant excess capital in some of our operating subsidiaries, particularly in London. And we will merge the GAIN entity in there and make better use of that capital. And there's also just some obvious synergies when you merge 2 businesses. You don't need 2 buffers, and things just kind of work better that way. Also, obviously, on the FCM side, we will just be merging that FCM into our FCM. And we have sufficient capital to carry that business. So in both instances, we can release a lot of capital -- a lot of the GAIN Capital out of that transaction and just better utilize the capital we have. We think this will amount to around $100 million, and we think this will be executed on very quickly because we just need to merge the FCM in. And in fact, in London, that will just operate as a subsidiary of our London business, and we'll get that capital relief immediately. I suspect there's more capital we can extract out of the business longer term. We've chosen not to build that in. I think this is the easy big number we can get. I think there's a smaller harder number we're going to work towards. So this is a busy slide, detailed slides here. Let me do my best to try and make this understandable. This is explaining how we get to the pro forma numbers. So if you want to look at the sort of top slice of that slide. On the left there, you can see the key drivers that GAIN uses to predict or drive their business. That's just really their rate per million revenue capture and the ADV. You can see the red diamond there was really the 2019 year we mentioned. The green diamond there is the 1-year projection we have used, and we spent a lot of time with GAIN coming to these projections. And then you can see the year 2 projection is that blue diamond. And that really sits right on top of the 3-year average. And that 3-year average takes into account the bad 2019 year, which was the multi-decade low for these metrics. And if you look at the purple, that was the best year GAIN had in recent history, which was really 2018. So with that all said, if you move to the right, you can see the adjusted net revenue of GAIN in 2017, '18 and '19. You can see what we've projected, which is that green little diamond on the left. So still way below 2018, still way below the 3-year average. And that's the year average gaining fruits 2019, but a modest return to better market conditions. And as Glenn has told you, that has already shown up in the January metrics that they have published. And then in year 2, we've assumed a bit of a reversion to the mean, being the 3-year average, and that's how we have come up with the revenue projections. If you then go down and look at the expenses, you can see there that the 2018 and 2019 number, GAIN has obviously, as they have announced, been diligently cutting their costs. And they have reduced their fixed overhead by $13 million. If you look at the 2019 adjustment, that basically is assuming the full year run rate or the full year effect of those cost cuts. So that's where GAIN would be if all of those cost cuts have been fully baked in for a year. That could be $226. And then you can look at the forward projections we've made off of that on costs. So moving to the right, you can see if you take the net revenue above, you take the cost numbers that we've just talked about, you can get to the stand-alone acquired EBITDA. So if you take $264 from the top and deduct $235 from the left-hand table, you can see that, on a pro forma basis, we would have gone or we would project to go from an $8 million stand-alone EBITDA, which was recorded in 2019, to $29 million in EBITDA for year 1. On top of that, you take our cost synergies from the previous slide. And you can see that we believe a year 1 EBITDA would be $50 million for us. And that is how that has been broken down. And you can see by the same logic and math where we would end up for year 2, okay? So this assumes 2 basic things. It assumes, on the cost side, the full run rate of the current cuts that GAIN has made during 2019, and it assumes the synergies from combining the 2 entities. Nowhere in these models have we assumed any revenue synergies or any benefits from GAIN utilizing our capabilities and products that we mentioned earlier. If you then get down to the bottom and you have a look at our trailing 12 months EBITDA of $83, you then add on, and I'm looking at a year 2 fully kind of -- fully synergized business as an example here, we would add $79 million of EBITDA. You then sort of run through all the adjustments to that for tax and whatever, and you get to $113 million. That's a 35% growth in EBITDA on a fully synergized basis. And if you look at the far right, that's how we go from a current 15% ROE to a 20% ROE in a fully synergized year-2 basis. I would like to add that I'm not saying it would ever happen, but one of the things we are getting in this deal is we are getting a lot of potential volatility on the upside. If we end up having a year like 2018, you would add another 5 percentage points onto the combined ROE. I'm not saying that will happen, but just to illustrate the leverage we have to better market conditions. So we are acquiring this business in the worst of market conditions. We believe we can get this business acceptably profitable on that base case just through synergies and costs. And if we have a return to more normal market conditions, this business can be significantly accretive to us. And of course, that ignores some of the benefits and industrial logic we have discussed upfront. Moving on, if you look at how that all shapes out in terms of an effective fully synergized price for us, you can see that it really goes from sort of an 11x EBITDA down to a 4x EBITDA. That is driven by 2 things. It is driven by the cost synergies we've just mentioned as well as the fact that we can, on a merged basis, extract some capital and, therefore, reduce the capital commitment to this business. And those 2 things, which are only possible by merging with us, drive us down to, I think, a fairly compelling financial transaction for our shareholders. Moving on to the last slide, I'm really not going to dwell on this because I think we've kind of covered this in all of our conversations, but this really comes back to the sort of 3 underlying theses that we've laid out for you. One is us providing more products and capabilities to GAIN to enhance their offering to really become more competitive in that midsized space for that active trader trying to take on some of the incumbents there, which kind of Glenn and I have always believed we can do. I think this gives us the ability to do that. The second thing is us adding some margin by doing things that GAIN couldn't do with their current flow. So internalizing, clearing and such. And the third aspect of that is, if we can combine our transaction flows, cross spreads internally, get better pricing in terms of how we look at risk off to the market, again, that will enhance margins. So really, all of those things are laid out here in more detail, and I think we've discussed them all. So the rest are the reconciliations. I'm sure no one cares about that. So why don't I stop there and see if we have any questions?

Sean, if I may just add to your point on the summary page there about opportunity. I think it's key that people realize those are measured and post-close timing in months, not in years. In a lot of situations, these deals put years on stuff. And I think what's really indicative of the value that can be created, to your point, in a short payback period, you'll notice a lot of those, say, 3 to 6, 0 to 3. And on the long tail of 12 to 18. That's key because it shows you what can be converted very quickly.

All right, operator, we're happy to take questions.

[Operator Instructions] Our first question comes from Rich Repetto with Piper Sandler.

So I guess, my question first is, when you look at the transaction, and you've done a fantastic job about the potential products that you can expand to each other and the potential synergies. But I guess, at least in the retail space, Glenn, you yourself have done a tremendous amount of acquisitions and roll-ups, where you can actually remove a platform. And synergies are substantially higher, I guess, when they're sort of within industry. So I guess, the question comes like, did you weigh acquisitions like that? Or did you entertain potential acquisitions like that, Glenn, and, again, acknowledging that there is a lot of benefits between INTL FCStone and GAIN as well?

So Rich, I guess, since you asked me directly, I'll respond by saying I think that, culturally, Sean and his team have shown a propensity to consider clearly all things that we'll use the word, again, industrial logic, here when they make sense to get considered. And I think that's consistent with what GAIN's philosophy and activity has been. INTL has been out there looking for opportunities to step in. And I think even for some of the ones that aren't as high profile, even recently, they're on the right side of a lot of these deals. And so I think it goes without saying, without Sean and I even having discussed this, that if and when opportunities arise, where they totally fold in, makes sense and provide both synergy capture from an expense perspective and revenue capture, I think Sean said it earlier, too, which you've heard me say that, Rich, when it's an opportunity to bring in new expertise or a new customer segment or a new product, where you think you can buy it much more quickly and effectively than you can build it, then you consider it. So I don't think that goes away at all, and I think it's a clear indication that's been experienced by both companies.

Okay. I think you -- I think my question was a little bit confusing, so let me be more direct. Did you conduct a competitive process? Because, I guess, what I'm saying is that sometimes with a like retail broker, there can be more expenses taken out. Was there a competitive process there? And again...

Oh, yes. Sure. Sorry if I missed your question. Yes, absolutely. A very thoughtful and a competitive process considering all the possibilities and all the opportunities. And we've tried to highlight some of those here, but by the same token, we're also saying, this is why this outweighed other opportunities that were there for sure.

Okay. And then, I guess, maybe a question for Sean or for either one, is we talked a lot about the optionality or you talked a lot about the optionality in buying GAIN when the CVIX is below -- has been below $6, and now it's popping back up a bit. So my question is, if you look back into not too far back, I'm looking at $6 prices back in 2018 and even sometimes in 2019, I believe, in a certain spike. So the question is, how did they come about a price that was $6 if you do think or if you do think that this... you could come back to activity levels or volatility levels that more trended towards historic levels?

Glenn, I think that might be for you.