Just four months after a down-to-the-wire rescue by outside investors Knight Capital is apparently considering a sale.
The trading firm suffered a massive trading error in early August costing it $400 million. The stock hasn't been able to fully recover despite a large rescue effort from outside investors, and now a couple of those investors are considering taking it over.
When Knight was on the brink of failure a handful of shareholders including Blackstone and TD Ameritrade stepped in and bought $400 million of 2% convertible preferred stock with the opportunity to convert into roughly 267 million common shares at about $1.50 apiece. Now a couple of those investors, namely Getco LLC and Virtu Financial, are expected to make bids to buy the very unit that was at the center of the disastrous trading blunder.
The Wall Street Journal reports that Knight's board of directors are expecting two separate proposals this week for the market-making business from high-speed trading firms.
A message left for Knight Capital has not been returned.
The news is giving Knight shares a hefty boost this morning. Shares are 10% to $2.74 but still a long way from their pre-trading-error levels of around $10. Knight posted a $389.9 million loss in the third quarter compared with a $26.9 million profit a year earlier.
The acquisition talks sparked KBW to upgrade the New Jersey-based firm to Market Perform from Underperform this morning. Analysts there said the upgrade comes as there's a lower likelihood of the stock performing based on standalone fundamentals and risk/reward for a time given the growing din of takeover speculation.
KBW analyst Niamh Alexander who covers the firm says she'd be surprised to see a piecemeal sale as some of the reports have stated. The WSJ notes that if Knight completes a deal to sell its market-making business to Getco or Virtu then its mortgage-origination business and Hotspot FX foreign-exchange trading platform could be on the block for separate sales.
"It may be challenging to retain value in all the parts if sold separately," notes Alexander.
The sale talks come just weeks after Knight CEO Tom Joyce told investors that the company was not in the process of considering a sale of its business units. But as his employment contract expiring at the end of the year more options appear to be on the table.
The change in strategy may not be so surprising considering just a handful of investors have some 70% of the company. "Knight's value has corrected itself and the firm has done a good job of reengaging with clients and retaining employees," Alexander says. But it's difficult for anyone to recover quickly in this environment. "No one has a crystal ball to see when volume will return," she adds.
