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Despite debt, merger issues, 2019 could see turnaround for TP Icap


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Despite debt, merger issues, 2019 could see turnaround for TP Icap

Interdealer broker TP Icap PLC's earnings and margins will gradually improve in 2019 after a tough 2018, but the London company will still face a large debt burden and problems completing a £1.3 billion merger agreed in November 2015, analysts told S&P Global Market Intelligence.

TP Icap issued a profit warning in July, cutting expected annual savings by 2019 from the merger by £25 million to £75 million, and fired John Phizackerley, its CEO since 2014.

Its share price dropped 44% over the course of 2018, and stood at 306 pence at 9:32 a.m. London time on Jan. 4. The broker/dealer finished the year by suing NEX Group Ltd., from which its predecessor entity Tullett Prebon purchased Icap's voice broking business, on Dec. 16, 2018; a lawsuit Shore Capital analyst Paul McGinnis called "strategically questionable."

Fewer cost savings

TP Icap had a difficult 2018, a year in which it reset the previous aggressive cost and broker compensation targets by which Phizackerley had hoped to generate savings, according to Marcus Barnard, financial research director at London stockbroker Numis. The plan backfired by causing several high-performing brokers to leave the firm, Barnard said in an interview.

Cost savings from the merger have not come to fruition, and voice broking revenues "are on the decline," added Steven Li, a London-based trader at U.S. technology trading company DRW.

Integrating the two voice-broker businesses, a task analysts previously expected complete by December 2018, now looks likely to take until December 2019, with "an incremental £60 million in costs between July 2018 and the end of 2019," said David Fanger, senior vice president for financial institutions at Moody's.

The broker/dealer also borrowed an unexpected £87 million in June 2018 to meet additional regulatory capital requirements which the Financial Conduct Authority imposed on several of its U.K. subsidiaries, he noted in an interview. TP Icap's gross debt will remain above 2.5x its EBITDA at least through the end of 2019, he said.

Investment banks have cut back on their riskier trading activities, Fanger said, creating challenges for TP Icap as well as rival broker/dealers such as New York-based BGC Partners Inc. and Switzerland's Compagnie Financière Tradition SA. The companies match over-the-counter buyers and sellers of illiquid assets including bonds and derivatives which are difficult to sell on exchanges.

A brighter 2019

But Numis' Barnard expects 2019 to be a much better year for TP Icap. He said the new leadership of CEO Nicolas Breteau and Chairman-designate Richard Berliand, whose selection was announced Dec. 14, 2018, was likely to strengthen staff morale and retention, which should in turn improve revenue generation.

Breteau is "from all accounts a man who can handle transition," agreed Michael Mainelli, director of London commercial think tank Z/Yen, who called the integration "clearly a culture problem."

Furthermore, regulatory burdens may in the end give TP Icap a competitive advantage over smaller rivals, according to a trader from a rival broker/dealer who wished to remain anonymous.

"MiFID II made it harder to run a business," he said, referring to new market rules designed to protect investors and promote transparency, which came into effect in 2018.

"My best guess is that it helps TP Icap long term because it makes it harder [for] small competitors," he said. "They'd get swallowed. And less competition is good for entrenched incumbents."

Breteau has indicated he intends to focus on data and analytics to supplement the broker/dealer's flat broking revenue. The new CEO said Nov. 2, 2018, that revenue from data and analytics had increased 11% between July 1, 2018 and Oct. 31, 2018, and said the company has a "firmly held belief that investing in growth areas such as data and analytics will benefit TP Icap over the longer term."

Meanwhile the firm's overall revenue in the first eight months of 2018, £1.48 billion, was 1% lower than the same period in 2017.

"Hopefully [the company] will start being in the news for better reasons soon," said TP Icap investor relations officer Sophia McLeod, who said her company has "a good team and [an] interesting story."