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Knight Capital Group Inc
TD Ameritrade Holding Corp
Evercore Partners Inc
Knight Capital Group Inc. (KCG) capped its biggest rally in nine years after getting takeover offers from Getco LLC and Virtu Financial LLC, setting up a bidding war that may end its 17-year history as an independent company.
Getco’s cash and stock offer values Knight at $3.50 a share, an 18 percent premium from the Nov. 27 close, and retains its public listing, according to a filing yesterday from the Chicago-based high-frequency trader. Virtu submitted a bid to buy Knight for about $3 a share, a person with direct knowledge of the matter said. Another person familiar said the company’s offer was made yesterday. Knight was bailed out by six financial companies in August after losing more than $450 million in a trading malfunction.
The offers represent divergent structures (KCG) for the surviving company and will force Knight’s board to choose between immediate cash and a value ascribed in part by the stock market’s view of Getco. Shares of the Jersey City, New Jersey- based market maker rose 15 percent to $3.42 yesterday, bringing its three-day rally to 37 percent, the most since July 2003.
“If you’re involved in a share deal, then you’re betting that their market is going to continue to grow and there is an upside after the deal, whereas in a cash-only deal the upside is you’re taking cash, and cash now,” said Sang Lee, managing partner at Boston-based Aite Group LLC, in a phone interview. “It really depends on how the shareholders look at the market that all these firms are in.”
Virtu, Getco and Knight are automated market makers. While Getco and Virtu operate across asset classes mainly on exchanges and similar platforms around the world, Knight focuses on U.S. equities. It’s also a wholesale market maker that services hundreds of retail brokers including Fidelity Investments and TD Ameritrade Holding Corp. (AMTD) by executing buy and sell orders for individuals. Neither Getco nor New York-based Virtu is in that business.
Knight slipped 3.8 percent to $3.29 as of 9:42 a.m. in New York. Volume for the company was 47.3 million shares yesterday, more than 18 times its three-month daily average of 2.58 million shares through Nov. 23, according to data compiled by Bloomberg.
Knight declined to comment on Getco’s proposal, citing a policy to not discuss shareholder activities, according to a statement from the company. Doug Cifu, president and chief operating officer of New York-based Virtu, declined to comment.
Under Getco’s proposal, its chief executive officer, Daniel Coleman, would head the new company and Knight CEO Thomas Joyce would be non-executive chairman. The offer is a 41 percent premium to the stock’s closing price on Nov. 23, the filing said.
Getco is proposing a two-step reverse merger in which Knight would be reorganized as a holding company with Getco receiving 242 million newly issued shares and warrants to buy 69 million more. The company would make a tender offer for up to 154 million Knight shares -- about half those outstanding, excluding Getco’s current stake -- at $3.50, or about $539 million. Getco’s existing stake in Knight, about 57 million shares, would be retired.
“They think there’s long-term value in the company because they’re making a bid and because of how the warrants are structured,” Keith Ross, CEO of PDQ enterprises LLC, a Chicago- based dark pool operator, said in a phone interview. He was head of Getco from 2002 to 2005. “The warrants give them an incentive to help the company be profitable. This is an additional carrot.”
Two people said automated market-maker Virtu plans to assert in talks with Knight that the offer is more attractive than the bid announced yesterday by Getco because it is for all of Knight’s shares and is more likely to be completed, according to two people familiar with the matter.
The proposal would be financed by capital contributed by Silver Lake Management LLC, which owns a stake in Virtu, other private equity firms and individuals, and a loan commitment of at least $1 billion led by Credit Suisse Group AG, another person said. All three spoke on condition of anonymity because the talks are private.
“An all-cash offer is going to trump mixed consideration, but we still don’t know where Virtu’s offer is going to be exactly above $3, while we know that Getco is at $3.50,” Sachin Shah, a special situations and merger arbitrage strategist at Tullett Prebon Americas Corp. in Jersey City, said in a phone interview. “The board will have to evaluate the merits of each offer and it may be looking for more from a white knight or from these two bidders.”
Knight shares were above $10 prior to the trading malfunction and bailout, which diluted existing owners by more than 70 percent. The company dodged bankruptcy almost four months ago when six financial firms, including Getco, provided $400 million to restore the company’s capital after the trading malfunction, when incorrectly installed software caused it to bombard U.S. exchanges with unintended orders.
“What happened with Knight made them more of a takeover target than other firms,” Adam Sussman, partner and director of research and Tabb Group LLC in New York, said in a phone interview. “It makes sense for the industry and the company. There’s an oversupply of capacity whether it’s on the market- making, execution or research side.”
Getco’s offer would result in no shareholder (KCG) owning more than 20 percent of the combined company and most large shareholders would be under 10 percent, according to the filing today. The board of the combined company would include four directors nominated by former Getco shareholders and three directors currently on Knight’s board. Getco said it has lined up $950 million in financing for the deal.
The ultimate value in combining Knight and Getco will depend in part on whether the shares trade at a discount or premium to their book value, which Getco estimated at $3.50, Christopher Allen, an analyst at Evercore Partners Inc. (EVR) in New York, said in a phone interview.
“What it would trade at post-bid is hard to say because we don’t know what Getco’s financials look like,” Allen said. “You’d have to know more about Getco’s profitability, risk profile, volatility of earnings and balance sheet before you could say whether they’d trade at a premium or discount.”
Knight has transformed over the last decade from mainly handling orders from individuals sent by brokers into a financial services company with institutional clients, electronic trading and businesses in fixed income and currency. It owns the Hotspot FX and BondPoint platforms, provides research and asset management and got into the reverse mortgage business in 2010. Knight had more than 1,545 employees at the end of September, it said in a regulatory filing.
In an Aug. 6 interview, Getco’s Coleman said Knight’s disappearance wouldn’t have yielded a “better world” for Getco. Without Knight’s ability to provide liquidity, “it would be more expensive for everyone to trade,” he said in a phone interview.
“In some ways Knight’s a competitor, in some ways they’re a client, in some ways we’re their client,” Coleman said. “But at the end of the day the liquidity they provide and I think the liquidity we provide probably makes both of us better. This is in our strategic interest to make sure Knight stays viable.”
Along with Getco, founded in 1999, the firms that provided capital to Knight in August included Blackstone Group LP, brokerages Stifel Nicolaus & Co. and Ameritrade and investment banks Stephens Inc. and Jefferies Group Inc. (JEF) Virtu does not have a stake in the company.
Jefferies profit from its stake in Knight may be pushed to $160 million based on the valuation Getco is proposing and $120 million for Virtu’s $3 a share bid. The firm acquired convertible preferred securities that were swapped for about 81 million common shares of Knight for $1.50 each.
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