BGC

Please note: On July 3, 2023, BGC Partners Completed a Corporate Conversion to Full C-Corporation, Name Change to BGC Group, Inc., and Ticker Symbol Change to "BGC". The note may refer to the company's previous name.

Publicly traded companies mentioned herein: BGC Partners Inc (BGCP), CME Group Inc (CME), MarketAxess Holdings Inc (MKTX), Nasdaq Inc (NDAQ), Tradeweb Markets Inc (TW)

Highlights

The presenter is long shares of BGC Partners Inc (BGCP), a London-based inter-dealer broker and electronic trading platform called Fenics Market Data. 

The presenter believes Fenics alone is worth more than the entire market cap of the company. The idea is based on a seemingly very large valuation discrepancy BGCP has vs. its peers. Comps to Fenics include Tradeweb Markets (TW), MarketAxess (MKTX), and CME (CME). All of these companies trade at high-teen revenue multiples, while BGCP trades at 1.5x.

Howard Lutnick is the CEO and the largest individual owner of BGCP. He has committed to closing that valuation gap based on the potential growth for Fenics.

Fenics just launched (on Nov. 3rd) a new interest rate futures product, which the presenter believes will be the source of significant growth for BGCP. The company has partnered with LCH Group Holdings (a majority owned subsidiary of London Stock Exchange Group), as the main clearinghouse to offer what the presenter believes will be the most efficient cross-margining in the industry. The presenter believes this offering will be superior to CME’s best offering today.

To create this new product, BGCP will contribute their US Treasuries OTC trading business to the effort. BGCP has also disclosed that they are speaking with strategic partners about a potential investment of third-party capital into this effort. If such a third-party investment occurs, it will likely provide an external valuation benchmark that could help the stock close the gap to some degree vs. peer valuations.

CME is the 800-lb. gorilla in interest rate futures, so even a small chunk of market share capture there would be very meaningful and likely noticed by the markets from a valuation standpoint.

The management team, led by Lutnick, has been shrewd about creating value for BGCP in years past. In 2013, BGCP sold e-Speed, another electronic trading platform, to NASDAQ OMX for what at the time was equal to the entire market cap of BGCP – about $1.2 billion.

In 2015, BGCP bought inter-dealer broker competitor GFIG for $750.5 million. Lutnick immediately sold the electronic segment of the business for $650 million, while also realizing close to $100 million in cost synergies, thus creating that acquisition for close to a zero basis. 

In early 2021, Lutnick sold an insurance brokerage business subsidiary of BGCP for $500 million, roughly 20% of the entire market cap at the time, despite that business contributing less than 5% of EBITDA. The company announced that it would use those proceeds to buy back stock.

The obvious question might be: Why, then, does the stock trade at such a massive discount to peers?

Part of that comes from an abrupt and aggressive move Lutnick made during COVID in cutting what was, at the time, a very meaningful dividend down to $0.01 per share. The presenter believes this move, while shrewd and well-timed during the COVID panic, alienated much of the shareholder base who were involved in large part for that dividend.

The presenter believes many investors view BGCP as a small-cap financials player with a still somewhat tight shareholder base and funky corporate structure, along with this history of making abrupt moves. Lutnick himself has a reputation for being a somewhat ruthless dealmaker inside and out of the company, the presenter acknowledged. These factors, the presenter believes, account for the significant valuation gap.

Those factors notwithstanding, Lutnick has demonstrated that when he’s intent on creating value for shareholders, he will do so. He is the largest holder of the stock, so his interests are very much aligned with outside shareholders.