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Icap Finalises EBS Deal

The much-anticipated sale of EBS to Icap is to go through, subject to regulatory approval, after the world’s largest interdealer broker agreed to acquire all of the share capital of EBS Group Limited.

Icap is to pay $775 million for the foreign exchange trading platform, towards the top end of initial estimates of $700-800 million.

The deal will create the largest over-the-counter trading system after Icap merges its Brokertec bond trading system with EBS. The new electronic trading network will generate more than $400 million in annual revenues and a third of Icap’s profits, Michael Spencer, Icap’s group CEO, told analysts after an announcement made on Friday 21 April.

"We will merge the largest fixed income platform globally with the largest foreign exchange platform to create a reach that is enormously greater than any other network for OTC transactions," he said.

Icap’s electronic broking operations – Brokertec – will be integrated with EBS to form a new single global electronic division to be headed by Jack Jeffery, currently chief executive of EBS, who will report directly to Spencer.

David Rutter, Icap’s current head of electronic broking in the US will become the deputy chief executive. Garry Jones, the European head of Icap Electronic Broking will keep his role.

Icap says it will buy all shares for $775 million in cash but is also offering the shareholders – made up of 13 banks including major currency dealers UBS, Citigroup, HSBC and JP Morgan Chase – up to one third of the value of their holding in Icap shares. This would increase the value of the deal to $825 million comprising approximately $517 million in cash and 36.1 million new Icap shares. Sources tell Squawkbox that the original 10shareholders invested approximately $3.5 million each in EBS when it first started out 13 years ago.

Icap believes that there are at least $32 million of annual cost synergies that can be achieved by 2009 through combining EBS with Icap’s electronic broking businesses. These include network infrastructure, IT and property costs.

Icap indicated that there would likely be some job losses. "In any transaction like this, there will be a degree of rationalization," Spencer said at the analyst meeting, although he declined to give a number.

In a statement released on Friday, Spencer said: "Our aim is to combine EBS’s strengths in electronic spot foreign exchange with Icap’s electronic broking business to create a single global multi-product platform with further growth potential and significant economies of scale.

"We have been very clear that our strategy is to grow Icap’s business both organically and by selected acquisition. In parallel with the continuing development of our voice broking business and the development of new markets, this acquisition takes us further towards our goal of offering comprehensive electronic execution and post-trade services for liquid, commoditised markets."

Jeffery added, "We firmly believe that the integration of EBS and ICAP is good for both organisations, good for our customers and good for the market as a whole."

The sale marks the start of a new era in the foreign exchange markets and the fallout could be significant. Although EBS shareholders that Squawkbox spoke to stress their confidence in an Icap-owned EBC – pointing out it is little different to the days when the voice broker community dominated the market – the fact is that the banking industry in particular, and perhaps the wider foreign exchange market, will have to deal with several potential issues.

First and foremost, the banks’ pricing engines will need to be looked at. In spite of protestations of the opposite from several banks, the price in the major markets such as EUR/USD and USD/JPY is heavily driven by the EBS price. Although little is expected to change in the near term, the sale of EBS could accelerate recent moves to intelligent pricing – specifically algorithmic pricing and trading within the banks.

As long as the banks had control of EBS they could be confident that the status quo would remain in place. However they have had a taste of what can happen with a wider EBS client group with the launch of EBS Prime, which allowed model traders from the buy side onto the platform. Several spot dealers at the major banks complain that market behaviour is occasionally skewed by the activities of EBS Prime customers, one going as far as to complain that the price pushed by their own proprietary platform is occasionally manipulated by customers "playing around with the price on EBS".

It will be interesting to see how EBS evolves from here, because as has been pointed out to Squawkbox in recent weeks, "Icap is not buying it to keep it as it is". Equally, as one observer notes, "the gloves can now come off". Specifically, those platforms that offer a similar model to EBS will feel more comfortable competing with Icap than with the banks they rely upon to provide liquidity. "This leaves the way open for a platform to welcome players from all segments of the markets – effectively trying to create an exchange for the professional market, hedges funds and banks together," the observer argues.

Equally, for Icap, its first requirement should be to keep the banks happy, although as more than one algorithmic trader has pointed out to Squawkbox, EBS Prime customers are providing a significant amount of liquidity to the market currently. So much so that more than one has been moved to say they can replace the banks.

Either way, a new era is about to dawn in FX.

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