What Should Investors Do With Their Plus500 Ltd Holdings?

It’s been a turbulent few months for Plus500 (LSE: PLUS). After being forced to freeze customer accounts by the FCA, the company’s business model has come under attack, forcing management to go on the defensive.

And the combined force of these two attacks has hit Plus 500’s share price hard. Over the past 30 days, the company’s stock price has been cut in half. 

Luckily, Plus 500 has been rescued by a white knight in the form of Playtech PLC, which has made an offer for the CFD provider. 

However, Playtech’s proposal is considered to be highly opportunistic. Playtech is offering £459.6m — equivalent to  400p per share — for Plus 500, which is little more than half May’s all-time high of 781p. 

Uncertain outlook

If there’s one thing the market hates it’s uncertainty and, at present, Plus 500’s outlook is uncertain. 

You see, Plus 500’s future as an independent entity rests on the company’s ability to recover from the recent bout of negative publicity and rebuild its reputation. This will take time, and there’s no knowing what could happen in the meantime.

And Plus 500 is likely to face increased regulatory scrutiny.  The company could face additional demands from regulators to increase background checks on customers, pushing up costs and putting the brakes on growth. 

Rising costs

Along with regulatory issues, there’s also the question of Plus 500’s rising marketing spend and the group’s high rate of customer churn.

Plus only managed to retain 35% of the 86,000 people who made a trade with the company during 2013. The cost of acquiring each user doubled to $1,120 during the fourth quarter of last year, compared to $542 for the year-ago period. Average revenue per user only increased by 30%, from $1,011 to $1,315 over the same period.

Management has already warned that 2015’s revenue will be lower compared to the level reported for 2014, with margins “expected to be significantly lower due to maintained marketing spend.” Clearly, Plus is starting to struggle. 

Get out of jail free

A high level of customer churn, rising costs, and regulatory issues are three key factors that are clouding Plus 500’s outlook.

Indeed, the recent bout of regulatory strife and corporate turmoil could either cripple Plus or send customer numbers surging, thanks to the free publicity. 

In the circumstances, it makes sense for shareholders to grit their teeth and accept Playtech’s offer.

That’s if the deal takes place. 

Playtech can still walk away from the transaction before its completion, which is currently scheduled for September. If the regulatory situation deteriorates, and Plus 500 is forced to undergo another round of regulatory compliance tests, either here in the UK or in other jurisdictions, Playtech could just walk away.

In this situation, there’s no telling what the future might hold for Plus 500. 

Sell up

Previously, I’ve commented that Plus 500 could be a great value play. However, after the company’s management accepted Playtech’s opportunistic offer, it is clear that management is no longer working for shareholders.

A management team that believed in the business and its prospects would immediately rebuff such a low-ball bid. This leads me to believe that there are more problems at Plus 500 than management is letting on.

And, for this reason, along with increased regulatory scrutiny and rising costs, it looks as if it could be time to sell Plus 500 and look for a better opportunities elsewhere. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.