* Getco offer values combined firm at $1.4 bln - sources
* Virtu offers to take Knight private for $1.1 bln - source
* Getco already owns 23.8 pct of Knight's shares
* Knight shares rise 15.2 pct
(Adds details, background, comments from analyst and source)
By John McCrank and David Henry
Nov 28 Rival electronic trading firms Getco
Holding Co and Virtu Financial LLC have made competing bids for
Knight Capital Group, valuing the company at a minimum of $1.1
billion, as they both eye Knight's lucrative market-making
business, sources said.
Getco proposed a $1.4 billion cash and stock deal that would
see it merge into Knight as a public company, while Virtu
offered a minimum of $1.1 billion in cash for what would end up
a privately held firm, sources familiar with the situation said
Knight's U.S. market-making business uses computer
models to match buy and sell orders in stocks and options and
executes around 10 percent of U.S. equity trading volume. It has
managed to stay profitable amid a steep market-wide slump in
equity trading along with increased competition.
There is no guarantee either firm will clinch a deal for
Knight, which was made vulnerable to a takeover this summer when
a trading glitch left it nearly bankrupt before a group of
investors stepped in with $400 million in emergency capital.
"We think it absolutely could continue to operate and
recover standalone over time," said Niamh Alexander, an analyst
at Keefe Bruyette & Woods. "However, the overhang of six large
shareholders along with the others won't make for an attractive
Knight's shares jumped 15.2 percent on Wednesday, and were
up 37.3 percent since Friday's close, before word of the
behind-the-scenes talks surfaced. Still, the stock was worth
just a third of its value from the day before the trading
Getco's proposal effectively would see it bought by Knight,
while Getco's management, led by Chief Executive Daniel Coleman,
would take control of the combined firm. The new firm would be
publicly traded, allowing General Atlantic, which invested in
Getco in 2007, to exit its investment.
"A private equity deal that's five years old is like 100
years in dog years," said an executive at a trading firm not
included in either bid, who spoke on condition of anonymity.
Talk has swirled around Getco going public for the past four
years, but the weak economic environment has prevented that from
happening, shackling General Atlantic to the high-speed trading
firm as equity trading volumes dropped to multi-year lows, the
person said. "This is their chance at an exit."
Getco already has a 23.8 percent stake in Knight.
Getco's cash and stock deal would value the combined company
at $3.50 per share, according to a regulatory filing and sources
close to Getco. That is a 41 percent premium over Knight's
closing price on Nov. 23, the day before rumors of possible
offers for Knight appeared in news reports.
Virtu offered to take Knight private for at least $3 a share
in cash, and Knight CEO Tom Joyce would remain at the helm, a
source with knowledge of the offer said. Virtu would look to
sell off Knight's businesses other than market-making.
Private equity firm Silver Lake, a Virtu investor, would
back the deal, along with other unnamed investors, the source
Knight makes markets and trades in more than 19,000 U.S.
equities. For the first nine months of 2012, Knight's U.S.
market-making unit traded an average of 3 billion shares a day.
Knight also owns bond and foreign exchange trading platforms
and a reverse mortgage lender. It also holds a stake of about 20
percent in Direct Edge, the No. 4 U.S. cash equities exchange.
The bidding for Knight comes shortly after the Jersey City,
New Jersey-based firm had to be rescued by Getco and other
investors after a software glitch in August unleashed a flood of
errant orders to the New York Stock Exchange, punching a $440
million hole in Knight's balance sheet.
The rescue was led by Jefferies Group, and also
included Blackstone Group LP, Stephens Inc and financial
services companies TD Ameritrade Holding Corp and
As part of the deal, General Atlantic, Blackstone and TD
Ameritrade, were given seats on Knight's board.
Jefferies is now backing Getco's bid, a source close to
Getco said. Jefferies spokesman Richard Khaleel declined to
comment because the firm's holding of more than 40 percent of
Knight's common shares makes it an insider.
A spokeswoman for Getco would not comment.
Chicago-based Getco, the No. 2 designated market maker at
the New York Stock Exchange with more than 850 listing
assignments, disclosed its offer in a filing with the U.S.
Securities and Exchange Commission on Wednesday. The filing
included an offer letter to Knight directors.
Getco is proposing a two-step deal. First, Knight would buy
Getco in exchange for 242 million newly issued shares, along
with warrants to buy an additional 69 million shares.
Then the combined entity would launch a tender offer to buy
up to 154 million shares at $3.50 per share. Getco and its
former owners would not participate in the tender offer.
The deal would leave the new company with more debt. Getco
said it has lined up $950 million of fully committed financing.
Knight's Joyce would become chairman of the board under the
terms of Getco's deal. The proposal would also allow Getco to
nominate four directors of the new company. Sources said Getco
is ready to proceed with the deal as early as Dec. 3.
But the public option might create a steep overhang on
Knight's stock, as Getco would have to restructure the new
entity to deal with the higher debt load, said the person
familiar with Virtu's offer. The warrants would also potentially
be very dilutive to the stock, the person said.
Knight shares rose 45 cents to $3.42 on the New York Stock
Exchange on Wednesday. On July 31, the day before Knight's
trading glitch, the company's shares closed at $10.33.
(Reporting By David Henry, John McCrank, and Jed Horowitz in
New York; Editing by Paritosh Bansal, Gerald E. McCormick, John
Wallace, Tim Dobbyn and Bernard Orr)