In what could turn out to be a bidding war, Getco LLC proposed to acquire Knight Capital Group Inc. (NYSE:KCG) at $3.50 per share, according to a filing. Getco chief executive Daniel Coleman said in a letter to Knight’s chairman Thomas Joyce that Getco wants to acquire the company.
Knight Capital Group Inc. (NYSE:KCG) shareholders will get both retained equity and cash in the new company. Getco already owns 24 percent of Knight, and has $950 million from a bank available for the acquisition. By acquiring Knight Capital Group Inc. (NYSE:KCG), Getco would successfully expand its business to over a hundred retail brokerage clients.
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The board of newly formed company will have four Getco board members and three Knight directors, Coleman proposed in his letter. He said, “We place a high value on Knight employees and would work to ensure significant retention of them.” Getco was among the six financial institutions that helped rescue Knight Capital after it lost $457 million due to a trading error in August. The trading blunder had created a massive whole in its balance sheet. Without the immediate funding from the six financial firms, Knight Capital would have collapsed.
Getco’s offer of $3.50 a share is a 41 percent premium to Knight’s closing price on November 23, and 18 percent more than yesterday’s closing price of $2.97. Though it seems a good premium, the offer price is still far lower than Knight’s price before the trading error. Before the trading glitch, Knight Capital shares were trading at over $10 a share.
Knight Capital Group Inc. (NYSE:KCG) shares jumped Tuesday on speculations of bidding offer from electronic market maker Virtu Capital and Getco. Virtu is expected to submit its proposal later this week. Knight shares surged 15.15 percent to $3.42 per share in market trading today. In pre-market trading, Knight Capital was hovering above Getco’s offer price of $3.50, indicating that shareholders are expecting a higher bid.
CNBC reported on Monday that Knight Capital Group Inc. (NYSE:KCG) is receiving offers from two companies. The terms were not disclosed, but CNBC expected the purchase price to be between $600-$700 million. Knight Capital has a current market capitalization of $431 million.
Christopher Harris, CFA, an Analyst at Wells Fargo & Company (NYSE:WFC) notes that the Virtu Financial offer would be for the whole company whereas previous reports had indicated a potential deal for only the market maker. As before, Getco is reported as the other interested buyer with both parties apparently nearing the final stages of preparing formal bids.
For comparative purposes, a $1B valuation for KCG approximates $2.80 per share while a valuation near TBVPS ($1.2B) approximates $3.30 per share. Wells Fargo & Company had originally thought that a valuation much higher than TBVPS for Knight Capital Group Inc. (NYSE:KCG) might be a bit of a stretch given business challenges and other public comps but the competitive nature of the bidding process (and potential cost saves) could possibly move the needle higher.
Fox Business has reported that Knight Capital Group Inc. (NYSE:KCG) is seeking a white knight to avoid being taken over by either Virtu or Getco. However, it is unclear to Wells Fargo who exactly this would be given the unique nature of KCG’s business [Fox mentions BlackRock, Inc. (NYSE:BLK)]. Ordinarily, a management team and board could be better prepared to fend off unwanted bids, but they believe that Knight Capital Group Inc. (NYSE:KCG) is at somewhat of a disadvantage given its shareholder base is much more short-term motivated following the recent capital restructure.