ConvergEx, an institutional brokerage and technology firm that has been on an acquisition binge since launching in 2006, is looking to divest two prime assets that could fetch the company as much as $1 billion, according to sources.
Such a deal would package Eze Castle, an order management system that is popular among hedge funds, and RealTick, the firm’s execution management system, sources said. Other software assets might also be part of the deal, but the brokerage unit is not for sale.
ConvergEx declined to comment.
In July of this year, Moody’s downgraded two tranches of the firm’s debt. Moody’s blamed the trading slowdown and the uncertainty surrounding regulatory investigations into a subsidiary. Senior secured first lien term loan was downgraded to B2 from B1 and the second line term loan fell to B3 from B2.
“People are really interested in this,” said one source. “There are a number of players taking a look, and Eze is the main attraction.” Goldman Sachs is ConvergEx’s investment banker, and sources said that a $1 billion price tag is what ConvergEx is looking for in a sale. Any transaction would give early investors a liquidity event, sources said, and allow them to cash out, if not entirely, as least partially.
Eze is said to be the “crown jewel” of ConvergEx. It has been the cornerstone of the firm since Eze Castle Software merged with the Bank of New York’s brokerage division to form BNY ConvergEx Group. From the beginning, ConvergEx’s goal has been to build a technology provider in the brokerage industry, making it less dependent upon commission business.
ConvergEx’s corporate finance profile has been a rollercoaster over the last year. It filed for an initial public offering in May of 2011 that would have raised $400 million. The IPO never happened. Two months later, CVC Capital Partners announced it was taking a stake in the company that would have made it the largest shareholder—one that valued ConvergEx at $1.9 billion.
But that deal never happened. CVC pulled the plug last December. The investment would have taken out private equity firm GTCR’s one-third stake, as well as a portion of Bank of New York’s one-third stake. ConvergEx management owns the other third of the company.
CVC bailed out of the deal, at least partly, due to an investigation by the Securities and Exchange Commission and the U.S. Department of Justice into a company subsidiary, ConvergEx said in a press release at the time. The subsidiary was an overseas unit that did transition management. ConvergEx closed the unit. The investigation continues to linger and has not been resolved as of yet.
Any sale would likely involve a financial buyer like a private equity firm, though strategic buyers are taking a look. One person familiar with trading platform valuations said that Eze and RealTick would bring in between $800 and $1 billion. Together, the two software concerns’ earnings before interest, taxes, depreciation and amortization are currently about $80 million.
However, he wasn’t sure about how much demand an EMS like RealTick would have, given the trading slowdown. Running an EMS is an expensive proposition. However, he said RealTick’s EBITDA is between $12 and $15 million a year. RealTick was purchased from Barclays in December, 2010 for $79 million, according to ConvergEx’s S-1 filing with the SEC.
Eze, on the other hand, is attractive because it has hundreds of hedge fund clients. Its EBITDA is estimated at between $65 and $68 million a year. Private equity firms are familiar with Eze, as many of them looked at investing in the company last year, said a source. As a result, that should cut down on the time it will take for a buyer to emerge. “Everyone is pretty much up to speed; they know who they are, what they do and what their numbers are,” the source said.
Interest should be keen, he added, pointing out that last year there were several losing bids from private equity firms that came in around $1.7 billion and $1.8 billion. Roughly 500 institutions use Eze, according to the source. In 2010, Eze had more than 400 institutions on board. It added 74 clients in 2011 and so far in 2012, it has another 44 new clients.
ConvergEx, according to the firm’s S-1 filing, earned $45 million its first year in business. However, its net income was negative for the next four years, though Dec. 31, 2010. It lost $49 million in that period. Long-term debt at the end of 2010 was $714 million, according to the S-1.
A deal should get done this year, a source said, but if it will close by Dec. 31 is another question, as “that would be incredibly tight.”
Goldman began marketing Eze and RealTick the first week in September.