Tullett Doubles Down on Phones as ICAP Goes Electronic

Updated on
  • ICAP's $1.6 billion sale completes shift to electronic trading
  • Tullett to issue about 310 million shares to finance the deal

Tullett Prebon Plc Chief Executive Officer John Phizackerley is betting 1.1 billion pounds ($1.7 billion) that bankers will still pick up the phone to trade for the foreseeable future.

Tullett, a broker of transactions between banks, is buying the voice brokerage division of rival ICAP Plc, doubling down on its main business, and helping ICAP Plc CEO Michael Spencer complete the transformation of his firm from the world’s largest telephone broker into a company that makes its money from electronic markets and post-trade services. Tullett, with roots that stretch back a century and a half, is aiming to reduce costs to protect already lean margins. The combined business will cut 60 million pounds of expenses over an unspecified time frame, Phizackerley said.

“At our existing scale, the rising costs of regulation mean that our margins have been under pressure,” Phizackerley said on a conference call on Wednesday. “Maybe the ecosystem is better with fewer interdealer brokers.”

Not so long ago, trades between banks were largely handled over the phone, often through a middleman at a firm like Tullett or ICAP. The growth of computerized trading since the end of the 1990s shook up that status quo. The future of bank-to-bank trading is clear: more and more transactions will be executed with the click of a mouse. Ten years ago, none of ICAP’s earnings came from electronic services. Today they account for 77 percent of trading operating profit.

In current market conditions, it doesn’t make sense for a company like ICAP to keep brokers who often command more than 50 percent of the revenue from their business as bonus payments, said Craig Pirrong, a finance professor at the University of Houston.

Consolidation Phase

“It’s a reflection of the move of markets toward electronification, in part because of regulatory pressure,” Pirrong said. “This is the kind of merger you see in a consolidation phase of an industry. There is still a role for human intermediation, but just not as much as there used to be.”

Tullett is buying the ICAP brand, which is better known than Tullett in the U.S., as well as some of the firm’s assets. Tullett will issue about 309.9 million new shares to ICAP’s shareholders and to the company itself to fund the deal. That would leave Tullett’s existing shareholders with 44 percent of the enlarged company. ICAP’s existing shareholders would hold 36.1 percent and ICAP NewCo would have 19.9 percent.

Shares of Tullett plunged 10 percent, the biggest daily decline since May 2010, to 322.90 pence after the news was announced. ICAP rallied 5.6 percent to 498 pence, the highest closing price in three months.

ICAP’s EBS and BrokerTec platforms, which trade currencies and bonds, will form the heart of the new business. Spencer refers to the remaining business as ICAP NewCo in recognition that he has to find a new name for the company when the deal is completed next year.

NewCo also keeps the post-trade businesses, TriOptima and Reset. The two divisions reduce risk for customers with large holdings of over-the-counter derivatives. One electronic market -- iSwap -- is moving over to Tullett under the deal. That’s because voice brokers often get involved to help execute the trades.

Higher Margins

The remaining assets have much higher margins than voice broking. In its fiscal year that ended in March, the electronic business generated only 259 million pounds in revenue, or one-third the amount earned by its “global broking” division, which includes the businesses Tullett is buying. But the electronic unit generated more operating profit: 93 million pounds versus 62 million pounds.

Tullett worked with Rothschild and ICAP was advised by Evercore Partners Inc., JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc.

ICAP is still involved in a Commodity Futures Trading Commission investigation into the alleged manipulation of ISDAfix, a global benchmark for interest-rate swaps.

Bloomberg News first reported in 2013 that the CFTC had found evidence that traders at Wall Street banks instructed ICAP brokers to buy or sell as many interest-rate swaps as necessary to rig ISDAfix by moving it to a predetermined level. Doing so helped banks reap millions of dollars in trading profits, costing companies and pension funds, the person said at the time.

The CFTC investigation centers on ICAP’s U.S. interest-rate swap desk, nicknamed Treasure Island because brokers there were paid as much as $7 million a year at the market’s peak, two people with knowledge of the matter said in 2013.

The global interest-rate benchmark is used by banks, corporate treasurers and money managers to determine borrowing costs and to value much of the $381 trillion of outstanding interest-rate swaps.

(As earlier version of this story was corrected to fix the spelling of Tullett CEO John Phizackerley’s name.)

— With assistance by Matthew Leising, and John Detrixhe

(Adds in eighth paragraph that ICAP shares closed at a three-month high.)
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