IG’s $1 Billion Bet on Tastytrade Seen as Pricey; Shares Fall

IG Group Holdings Plc shares fell the most in five months after it agreed to buy Chicago-based online brokerage Tastytrade Inc., with analysts raising concerns over the $1 billion cost of its bet that U.S. retail investors will embrace derivatives.

The deal comprises $300 million in cash and the issuance of 61 million IG shares to Tastytrade shareholders, according to a statement. The combination would add Tastytrade’s more than 105,000 active accounts to IG’s platform, whose core markets include the U.K., European Union, Australia and Singapore.

IG shares fell almost 10% before trimming the decline to close down 8.5% in London. The firm is paying a “very punchy” price for the acquisition, Canaccord Genuity analyst Justin Bates said by email. Tastytrade’s growth rate is currently benefiting from the “supernormal” contribution of market volatility in 2020, he said.

“Investors can also be forgiven for wondering if history is about to repeat itself,” said Bates, citing IG’s acquisition of FXonline in 2008, where increased regulation hurt profitability.

On a conference call with analysts, Chief Financial Officer Charlie Rozes cited Tastytrade’s investment in growth, saying it was too early to provide guidance on future margins at the U.S. firm.

“On the surface of it, it looks very expensive,” Shore Capital analyst Vivek Raja said by phone. “In order to justify this quantity of invested capital, the earnings over the next couple of years need to do a hell of a lot.” The absence of guidance on Tastytrade profit means “the market is just kind of shooting first and then waiting for more information,” added Raja.

Not Robinhood

“We see a secular shift in the market for self-directed investing and trading,” IG Chief Executive Officer June Felix said in an interview on Thursday. “Individuals will be taking more control of their financial outcomes and financial wealth, and this fits perfectly into that,” she said. “Derivatives is the next step.”

The online share trading industry has enjoyed a surge in volume in the past year as market volatility and work-from-home orders draw more customers to platforms such as Robinhood Markets Inc. British platform AJ Bell reported a 30% rise in clients on Thursday.

“It’s not the Robinhood segment -- that’s going after anyone that can sign on, anybody that is interested but not necessarily informed,” said Felix of IG’s acquisition. “This is going after, educating and also serving the more active and informed, wealthier, older group of traders.” The average age of options traders is about 50, she added, and derivatives allow clients to manage risk in a “more holistic way.”

Felix, an American former banker for Citigroup Inc. and JPMorgan Chase & Co., took the top job at IG in October 2018. She has been looking to boost the firm’s presence in the U.S.

Jefferies advised IG on the transaction, which is expected to complete in the summer of 2021.

IG’s $1 Billion Bet on Tastytrade Seen as Pricey; Shares Fall

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