BGC PARTNERS INC Long BGCP / Short NMRK
July 16, 2018 - 3:38pm EST by
Akritai
2018 2019
Price: 11.23 EPS 0 0
Shares Out. (in M): 482 P/E 0 0
Market Cap (in $M): 5,413 P/FCF 0 0
Net Debt (in $M): -260 EBIT 0 0
TEV ($): 3,010 TEV/EBIT 0 0

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  • Spin-Off
  • RemainCo
  • Equity stub
  • Stub
  • Special Situation
 

Description

Company: BGC Partners, Inc. (“BGCP” or “the Company”)
Recommendation: Buy hedged BGCP
Trade: Buy BGCP (pre-spin)
Short 0.47851 shares (the spin ratio) of NMRK per BGCP (to create BGCP standalone)
Short BGCP’s standalone value (BGCP less NMRK distribution value) via XLF as a hedge                   
Upside: 39.9%
Downside: -15.1%
Upside/Downside: 2.64:1
Timeline: Q4’2018 / Q1’2019

 

BGCP has been written up three times before on VIC, by danconia17 on 11/17/2009, rii136 on 02/04/2013 and compass868 on 11/23/2015. The current trade recommendation will focus on the upcoming spinoff. Please refer to the three other excellent VIC write-ups for historical context.


Trade Recommendation

BGCP is spinning out its residual shares in Newmark and de-consolidating it from its balance sheet. The resulting corporate event will materialize in a new BGCP. The new BGCP has:

15% revenue in electronic brokerage referred to as Fenics, a high margin (~40% pre-tax adj. earnings margin) that has grown revenue at a 24% CAGR from 2010-Q1’18 LTM.

A remaining business in traditional hybrid/voice brokerage, which recently grew by acquisition to have 35-38% of overall market share. The hybrid/voice brokerage has a focus in esoteric products that are less impacted by growth in electronic trading. While this sub-segment is partly impacted by the movement to electronic, any flow from hybrid/voice to Fenics is highly margin accretive.  

An under-levered balance sheet with a net cash position and a proven management team with a history of value creation.

Currently trading at 7.57x management’s $398MM Q1’18 LTM EBITDA, pro-forma for the new balance sheet and NMRK shares to be received upon spin. Adjusting management’s Q1’18 LTM EBITDA headline number to $359MM for onetime items results in slightly lower valuation, though still attractive at 8.38x.

Trade:

Buy BGCP equity.

Short 0.47851 shares (current spin ratio) of Newmark per share of BGCP to hedge the incoming spinoff distribution and create BGCP standalone/RemainCo.


Short equal amounts of the Financial Select Sector SPDR Fund (XLF) shares per BGCP standalone value (i.e. BGCP pres-spin value less expected NMRK distribution value), as a sector hedge.

Once BGCP spins out Newmark, valuation will re-rate. BGCP’s SOTP value gives a current target price of $15.71, a 39.9% upside from the current stock price and a downside of 15.1% for a 2.64:1 upside/downside ratio. Upside and downside are outlined in the SOTP and differs on multiples used and spin conversion ratio.

Situation

On December 13, 2017 BGCP conducted a partial IPO of Newmark Group, Inc. (NMRK) by offering 20MM shares at $14/share and 3MM via greenshoe. The original expectations were for a 30MM share issuance at $19-$22/share and 4.5MM of greenshoe. Proceeds of $298.3MM, net, were used to pay debt.

Currently BGCP owns 59% of Newmark common stock, with over 90% total voting power and fully consolidates NMRK’s operations. By year end, BGCP intends to spin the remaining shares in NMRK and separate the two companies’ balance sheets, repaying debt Newmark owes to BGCP but is consolidated on BGCP’s balance sheet as a liability, leaving BGCP unlevered post transaction.

Company Overview

BGCP today is a combination of an interdealer broker and a commercial real estate (CRE) brokerage. The company's mix is currently 45% real estate services (CRE, the SpinCo) and 54% financial services (the RemainCo) as shown below.


Source: BGCP Q1’18 Investor Presentation

The interdealer broker (BGCP’s business post-NMRK spin), or financial services, operates as an agent between various counterparties trading illiquid derivative products in the OTC market (interest rate swaps, credit, FX). Within this segment BGCP’s crown jewel is its electronic trading Fenics business. This business consists of ~15% of the segment’s revenue and has ~40% pre-tax adj earnings margins. Products traded include interest rate derivatives, credit, FX, bonds; the segment also includes software, market data and post-trade services. Comparable companies are the NEX Group.  The other part of the business is the traditional voice/hybrid business at mid-to-high-teen earnings pre-tax earnings margin with 2,468 brokers and salespeople. Comparable companies include TP ICAP PLC and CFT SW.

The CRE segment (Newmark), or real estate services, provides leasing and sales and property management services for large corporate customers, similar to a Jones Lang Lasalle (JLL) and a CBRE Group (CBG).

Corporate Transaction

Spin Shares (Table to Follow)

BGCP currently owns 150.3MM shares in Newmark to be spun to BGCP holders at the event, comprising 59% of all Newmark shares. Post distribution, the float in Newmark will increase from 9.1% to 68.2%. The spin ratio is 0.47851 Newmark shares per BGCP participant.

While management is targeting a 0.47851 spin ratio, there is risk this number declines to a 0.31183 spin ratio if all of BGCP’s units convert to class A and B shares, thus accruing less value to current BGCP class A and B holders.


The distribution and spin ratio are all calculated and shown below:



Balance Sheet (Table to Follow)

Importantly, both companies share a balance sheet and post spin this will end, as well as the intercompany loans in-between them with Newmark paying debt owed to BGCP and refinancing shared debt where Newmark is the obligor.

Key balance sheet points of the transaction:

Newmark – At 3/31/18, NMRK had long term debt of $813MM and short term debt of $202MM for a total of $1,015MM in debt.

o Newmark debt is broken down as follows:
$202MM in short term intercompany borrowings – borrowed from BGCP and payable to BGCP.
$400MM converted term loan; NMRK is the obligator and plans to refinance this loan.
$300MM 2019 promissory notes payable to BGCP.
$113MM 2042 promissory notes payable to BGCP.

o In addition, assets include:
Cash of $48MM.
The company also has restricted cash of $243.9M; however the bulk of this is required for their credit profile and regulatory reasons.

BGCP – At 3/31/18, BGCP had total debt of $1,382MM, this included:

o Newmark consolidated debt:
$398MM of unsecured term loan (the converted $400MM term loan, an obligation of NMRK).
$298MM 5.375% senior note ($300MM 2019 promissory notes payable to BGCP).
$109MM 8.125% senior note ($113MM 2042 promissory notes payable to BGCP).

o BGCP standalone debt:
$6MM in short-term borrowings (Itau Unibanco S.A.).
$241MM in 8.375% Senior Notes ("GFI" Notes).
$297MM in 5.125% Senior Notes (Make-Whole, CoC at 101).
$32MM in collateralized borrowings.

o Intercompany receivables:
A total of $430MM of intercompany obligations. This includes:
$298MM 2019 Promissory Notes - Payable to BGCP.
$109MM 2042 Promissory Notes - Payable to BGCP.
Two short term intercompany loans netted are $22MM, consisting of:
o $202MM Short-term borrowings to NMRK from BGCP.
o $180MM Short-term borrowings to Cantor from BGCP.

o In addition, assets include:
Cash of $363MM (this includes $48MM of consolidated Newmark cash).
Other liquid assets of $92MM:
($89MM in securities owned plus $3MM in marketable securities ($96MM marketable securities less $93MM securities loaned) less $1M in repurchase agreements.

Separate capital structures are given in the pro-forma capital structure section.

 

The below worksheet summaries this section:


Nasdaq shares (“NDAQ”)

On June 28, 2013, BGC sold eSpeed to Nasdaq, Inc. for $750MM in cash plus an expected payment of up to 14.9MM shares of Nasdaq common stock paid ratably over 15 years beginning in 2013, assuming Nasdaq generates at least $25MM in gross revenues each of these years (vastly below the current level).

In connection with Newmark’s IPO in December 2017, BGC transferred to Newmark the right to receive the remainder of the Nasdaq payments. Newmark recognized the first of payment in Q3’17, and planned to receive shares ratably in Q3 of each of the next ten fiscal years (0.992MM shares a year).

On June 18, 2018 Newmark entered into a transaction that essentially saw NMRK:


Receive net proceeds of $153MM, with proceeds being used to pay down the converted term loan.


Monetize 2019/2020 Nasdaq shares and issue $175MM of exchange preferred limited partnership units.


Newmark, post the recent sale, retains several years of NDAQ share distribution. The below calculates the total value to Newmark based on the recent NDAQ stock price. The total undiscounted and untaxed value is $747.8MM, or $654.4MM not including the upcoming Q3’18 payment. This corresponds to the 6/20/18 BGCP annual shareholders meeting conference call, which stated this value to be approximately $650MM.

Using NDAQ’s WACC as the discount rate and Newmark’s tax rate, results in a post-tax NPV value of $431MM, as highlighted below.


Pro-Forma Capital Structures

The below summarizes the new capital structure of Newmark and BGCP with summary financials.

Newmark new capital structure and summary



As Newmark will be hedged out via a short of Newmark’s current stock in the same ratio as the spin-off ratio, a simple projection model based on consensus expectations was used.

BGCP new capital structure and summary