A US activist investor is pushing the board of TP ICAP to sell the UK interdealer broker following what it describes as a “disastrous share price decline”.
Phase 2 Partners, a US hedge fund led by investor Justin Hughes, has written to TP ICAP chair Richard Berliand urging him to appoint advisers and consider strategic alternatives so “long-suffering shareholders can receive a share price that reflects underlying value.”
TP ICAP’s shares have fallen by 45 per cent over the past year.
The San Francisco investment company said there had been little success resulting from TP ICAP’s long-term plans under its current governance and ownership structure. Phase 2 Partners said it owned 7.7mn shares, held via total return swaps, making its position equivalent to one of the 20 largest shareholders.
“We think that there may be a more attractive future for TP ICAP under new ownership and a sale of the company could be an attractive alternative for stakeholders, given the substantial undervaluation of the company’s shares,” it wrote in the letter.
The move puts pressure on the British group, which acts as an intermediary for off-exchange markets, to boost its performance. In the past five years it has spent £1.3bn on the global broking business of ICAP and a minimum $575mn on equities trading venue Liquidnet. Even after Tuesday’s 12 per cent rise, TP’s market capitalisation stands at just over £1bn.
Shareholders who took part in a 2-for-5 rights issue at 140p per share a year ago to pay for Liquidnet are sitting on a paper loss on their investment.
TP ICAP said it noted the letter and “maintains an active and engaged dialogue with all its investors and is focused on delivering value to shareholders.” It would issue a further statement if and when appropriate, it added.
Hughes led a push to boost shareholder returns at US brokerage Investment Technology Group in 2015 when he was at Philadelphia Investment Management, a small US hedge fund. The pressure led to changes at the board and its eventual sale to Virtu Financial in 2017. Philadelphia also shorted TP ICAP in 2014 and the shares of Plus500 in 2018, on expectations that new rules would curb the UK spread better’s profits, months before the company issued a shock profit warning.
The letter came less than a week after TP ICAP shares dropped 15 per cent on publication of its full-year results. Investors fretted over a decline in margins while Liquidnet revenues in the first year of ownership were marginally below its guidance of £160mn to £180mn.
“At the current price, the market is implicitly valuing the interdealer broker operations at a negative value despite them being both profitable and cash generative,” said Kim Bergoe, an analyst at Numis.
In its letter, Phase 2 Partners said interest from potential strategic acquirers and private equity sponsors should be “robust given the volume and valuations of recent M&A”.
The hedge fund criticised TP ICAP senior executives for not having enough of their total pay in equity and called for greater alignment between board and management incentives, and those of the shareholders.
“To fix this problem we encourage the board to take all compensation in the form of equity and for management to take all incentive payments as equity awards,” it said.
It also took aim at the lack of share repurchases and the steady decline in margins at the business, even though the management had bought Liquidnet and expanded its data and analytics business to arrest the long-term decline.
Last week TP ICAP reported an earnings margin, before interest and tax, of 12.5 per cent. That compared to 14.8 per cent for Tullett in 2016, the last full year before it purchased the ICAP assets.
Source: Financial Times
