Jefferies Financial Group has provided details on its acquisition of Stratos formerly known as FXCM.
During the fourth quarter of 2023, Jefferies acquired Stratos Group International (formerly FXCM Group, LLC or “FXCM”).
Jefferies has historically held a 49.9% voting interest in Stratos. In March 2023, certain bondholders of Global Brokerage Inc. (“GLBR”) filed for involuntary bankruptcy against GLBR and its subsidiary, Global Brokerage Holdings LLC (“Holdings”), which owns 50.1% of the voting equity in Stratos.
On September 14, 2023, Jefferies completed foreclosure of the collateral that GLBR had pledged to secure its obligations under a credit facility, which consisted of GLBR’s equity interest in Stratos. As a result of the foreclosure, Jefferies owns 100% of the outstanding interests in Stratos. and Stratos has become a consolidated subsidiary.
In connection with the acquisition of the additional 50.1% interest in Stratos, Jefferies extinguished Stratos’ senior secured loan of $39.2 million and recognized a gain of $5.6 million.
Upon acquisition, Jefferies revalued the previously existing 49.9% rate at fair value and recognized a loss of $4.7 million, representing the excess carrying value of the 49.9% rate on Jefferies’ investment of $47.9 million with the equity method relative to its fair value at the date of acquisition. The fair value of previously existing equity was measured using an income approach based on estimates of future expected cash flows, applying a risk-adjusted discount rate of 24.5%.
Critical estimates for deriving future expected cash flows include the use of projected revenues and expenses, applicable tax rates and depreciation rates at the risk-adjusted discount rate based on an estimated weighted average cost of capital for the business being acquired.
No consideration, other than the non-cash exchange of Jefferies’ senior secured term loan, was transferred in connection with the foreclosure, which resulted in Jefferies acquiring 100% ownership of the outstanding Stratos holdings.
In implementing the acquisition accounting, Jefferies estimated the total corporate fair value of Stratos in accordance with the methodology used to fair value Jefferies’ previously existing 49.9% equity interest. The fair value of the business was allocated based on the fair values of the assets acquired and liabilities assumed resulting in a gain of $0.9 million and goodwill of $5.5 million.