Knight Capital Group Inc. (KCG) rejected a last-minute, $500 million rescue-loan offer from Citadel LLC on Aug. 5 as it worked on a competing plan from a group of investors, said two people with knowledge of the matter.
The loan terms would have given Citadel a minority stake in Jersey City, New Jersey-based Knight’s stock and an interest in the market maker’s HotSpot foreign-exchange subsidiary, said the people, who spoke on condition of anonymity because the talks were private. Citadel, the $12.5 billion hedge fund run by billionaire Ken Griffin, competes with Knight’s market-making and electronic-trading business.
Citadel, which had walked away from a previous round of talks on Aug. 4, made the offer as Knight Capital was completing a $400 million capital infusion from a group of investors led by Jefferies Group Inc. (JEF) That transaction, which was completed yesterday, gives the new investors rights to take a more than 70 percent stake in Knight. In Citadel’s offer, shareholder dilution would have been between 10 percent and 20 percent, according to another person familiar with the offer.
“Knight explored a wide range of alternatives,” Kara Fitzsimmons, a spokeswoman for Knight Capital, said in an e- mailed statement. “After a thorough review, Knight determined that the $400 million equity investment was the best and only alternative for the company and its shareholders.”
Knight sought the lifeline after a programming malfunction spewed orders through exchanges Aug. 1 and saddled the company with a $440 million trading loss. The stock is down 70 percent in the past five sessions.
The Aug. 5 offer capped days of intermittent talks between Citadel’s Griffin and Knight, led by Chief Executive Officer Thomas M. Joyce. Griffin brought a team from Chicago to Knight’s headquarters on Aug. 3 to examine the trading firm’s books, said people with knowledge of the matter. Citadel had also offered a smaller loan to Knight on Aug. 3 as interim financing, an offer that Knight rejected, one of the people said.
On the afternoon of Aug. 4, Griffin and his team ended discussions and returned to Chicago, these people said.
By the time Griffin tried to re-engage by submitting the $500 million offer in the afternoon of Aug. 5, Knight was already concluding negotiations over the terms of the Jefferies investment, these people said. The Citadel loan offer consisted of a “term sheet” outlining the offer, the people said.
Knight has diversified its business by offering trading services to institutional investors and adding platforms to trade currencies and fixed income. The company also expanded its market making to options and futures and has built up its a European operations.
Citadel’s electronic-trading and market-making business is a unit of Citadel Securities, which says it executes about 10 percent of U.S. equity volume, according to its website, a similar amount to Knight.
Griffin hired Knight’s Jamil Nazarali and Matt Cushman, who were managing directors at Knight’s electronic-trading group, last year to lead a new effort in quantitative trading, two months after they resigned from Knight.
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