On Monday, financial group StoneX announced that it will acquire RJ O’Brien for $900m. The deal is set to go through in the third quarter of this year, subject to regulatory approvals.
It will bring to an end more than a century of RJ O’Brien being operated as a family business.
There are a few reasons why the acquisition took place and I thought it would be fun to go through them.
- StoneX can’t grow otherwise
Like a lot of financial services businesses, whether its banks or brokers, StoneX has limited wiggle room to grow organically. It is a big player in a saturated market.
This is why, if you look back over the last decade, the company has made close to 40 acquisitions.
For TradeInformer readers, the most notable of these will have been the GAIN Capital purchase in 2020. That allowed StoneX to enter the retail broker space by acquiring the City Index and FOREX.com brands.
However, other purchases, like payments firm SWIFT Service Bureau or Singaporean broker UOB Bullion and Futures, had similar goals – entering new business lines and/or new geographies.
The basic logic behind the RJ O’Brien deal is the same – it’s profit growth via acquisition. StoneX would find it close to impossible to enter the markets that RJ O’Brien has been successful in, so acquiring them instead makes much more sense.
- RJ O’Brien has good interest rate and IB revenue
On that final point, one of the peculiar points about the deal is the number of new business lines it gives StoneX.
The reason I say peculiar is because I tended to think of them as relatively similar businesses, who would thus attract a similar client base.
Interestingly, StoneX Executive Vice Chairman Sean O’Conner noted on a call on Monday that there is almost no overlap between the two client books.
How accurate that is remains to be seen – O’Conner noted they did not have visibility over all clients – but there are probably two key business lines here.
One is that RJ O’Brien has a strong network of introducing brokers in the US, particularly for its commercial hedging business.
Another factor is RJ O’Brien’s success in rates markets. This is an area that they are dominant in and, as noted above, it would have been extremely hard for StoneX to acquire the level of market share they have via their own efforts.
- StoneX got a reasonable price
StoneX is paying $900m for RJ O’Brien, with the bulk of that ($625m) coming from newly issued debt. Another large chunk ($275m) will be paid via newly issued shares. Finally the company will use $28m of its own cash and $188m drawn from a $500m revolving credit facility.
Arguably the ‘true’ purchase price is higher than the $900m headline value, as StoneX will have to assume responsibility for $138m in RJ O’Brien debt, plus a $50m RCF, and $28m in fees, which makes me feel like I should be in the investment banking game.
Whatever the case, although the accounts list RJ O’Brien ‘EBITDA’ of $170m, actual net income is $101m, meaning StoneX is paying 9x earnings for the company.
One way of looking at that is this is a low growth business and so this is an ok valuation, with earnings likely to slowly justify the purchase price over the next 5 – 10 years.
However, RJ O’Brien’s CEO Gerry Corcoran noted that the company was “not positioned for a sale, it was positioned for growth.”
Obviously Corcoran will be talking his own book but there is some substance to that claim.
To use a comparison, Plus500’s entrance to the US retail and institutional futures market has seen it – very quickly – achieve strong revenue growth, with that line of business now accounting for approximately 10% of overall group revenues.
There is growing retail and institutional demand for futures and other derivatives products. Both StoneX and RJ O’Brien are in a good position to benefit from that, meaning this could be more than just buying a low growth competitor as a bolt on acquisition.
- Costs and cross sells
The final point that’s worth highlighting here is the potential for that much vaunted M&A term – synergies.
The two companies will purportedly be able to cut headcount costs by $35m post-acquisition and reduce technology expenses by $15m, meaning total cost savings of $50m for the combined group.
Leaving aside complimentary business lines – RJ O’Brien’s rates business or StoneX’s retail footprint – there is also the opportunity to cross sell.
For example, StoneX can provide liquidity and market making services to RJ O’Brien’s existing book of commercial hedging clients and financial institutions.
StoneX can also expand on RJ O’Brien’s existing retail and institutional business by providing wealth management solutions and capital introductions, with the latter presumably targeting smaller hedge funds and asset managers.
StoneX and RJ O’Brien acquisition overall
So overall there is a fairly standard set of M&A reasons for this deal.
StoneX got a relatively good price for RJ O’Brien.
In acquiring the firm it gets access to new markets and products that it would struggle to otherwise obtain. It can sell those clients its own set of products and services to enhance overall revenues.
Finally you get some cost synergies and the potential to have a larger, more cost-effective group entity. Simple.
