Business Analysis: IG Index bets on swift return to stock market

Spread-betting group rides wave of growth
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IG Group, the pioneering spread betting company founded by the legendary gambler and Tory donor Stuart Wheeler, has announced plans to return to the stock market only 18 months after leaving it to go into private hands.

IG Group, the pioneering spread betting company founded by the legendary gambler and Tory donor Stuart Wheeler, has announced plans to return to the stock market only 18 months after leaving it to go into private hands.

Riding a wave of growth in the betting and gambling industry, IG Index looks set to raise as much as £200m from a float, some of which it will use on acquisitions. The listing is set to take place in May and the company is expected to be worth at least £375m.

Few punters would have bet against IG Group staying out of the limelight for long, given its colourful place in the City courtesy of Mr Wheeler. Clem Chambers, of the financial data business ADVFN, said: "The history of the IG Group is really the history of Stuart Wheeler. He practically invented spread betting."

It was Mr Wheeler's decision in 2003, at the age of 67, to sell his stake that thrust IG Group in to private ownership. Another group of long-standing shareholders also decided to sell up, putting 45 per cent of the company on the block. The management, led by its chief executive Nat le Roux, formed a buyout team with the backing of CVC Capital. It secured a takeover for £143m in the summer of 2003.

Mr Wheeler, who famously played cards with Lord Lucan only two days before his disappearance, had grown tired of his day-to-day administrative chores after 29 years in charge. He set up IG Index in 1974 from his home in Clapham with a £5,000 loan, offering bets on the gold price.

He branched out into taking bets on the FTSE and the Dow Jones, and virtually created a new industry of spread betting. This allows punters to bet on which way a particular event or instrument - be it a share price, stock market index, or football match - will move. Punters win more or lose more depending on how far the instrument moves. Spread bets are entirely tax-free and have found a devoted following.

Mr Wheeler, who made history with a £5m donation to the Conservative Party, wanted more time to play cards. During his retirement, he was ranked as high as 33 in the World Poker Series. He banked about £34m from the sale of his stake, which helped him to refurbish his Jacobean castle in Kent.

His departure caused some consternation that IG would lose its way, and there are sceptics who think IG may be asking too much of shareholders to come back so soon. Private equity groups normally hold on to their investments for three to five years before cashing in.

According to sources close to the company, the private equity takeover was a last resort. Mr le Roux and the management team had trawled round institutional investors to find a buyer for Mr Wheeler's shares. But in March 2003, the City was reeling as the FTSE fell below 3,300. Taking a punt on IG was a non-starter, and the management team had to look elsewhere for a new partner.

CVC Capital took on a 59 per cent stake in the company, but the float will not bring an immediate exit for it. It plans to remain a significant shareholder, as does Mr le Roux and the management team, who own a 26.4 per cent stake.

Given that its shareholders are not folding their hands, the sudden return of IG is perhaps a sign of the boom in internet betting groups and the need for the company to cement its leading market position. Betfair, the betting exchange which allows punters to match bets directly against each other, is looking to stage a £700m float this year. Party Gaming, behind the PartyPoker brand, is also expected to float this year with a market capitalisation of about £3bn, putting it straight in the FTSE 100.

IG is undoubtedly seeing a growth in business. It announced record interim results yesterday, with turnover up 28 per cent at £29.5m and earnings up 40 per cent at £16m. IG's new product offering, a form of spread betting called binary betting where punters' gains and losses are capped, is now delivering 10 per cent of turnover.

But one of its most promising areas is a type of trading known as a contract for difference (CFD). These instruments allow punters to buy, in effect, a block of shares at only a fraction of the price. If the shares go up, the punter banks the rise as if they had paid the entire amount. They are high risk, though, as the same principle applies if the shares go down.

Firms such as IG, City Index and Cantor Index, take commission for carrying out the trade. Tom Hougaard, of City Index, said this type of trading has become very important. "These allow people to make short-term trades, which are sometimes only in play for a few hours, without paying stamp duty. Traders do have to pay capital gains tax, however," he said.

Estimates suggest that as much as 35 per cent of daily trading on the London Stock Exchange is via CFDs. According to David Buick, of the rival firm Cantor Index, CFDs will become an increasingly bigger feature of daily share trading. "People don't make long-term bets on stock markets any more," he said. "Markets are too volatile, and CFDs allow punters to trade on a margin, rather than directly in the shares."

He said IG Group was still held in very high regard by the City. "But it is facing more competition in the market than it used to," he said.