Knight Capital Group Inc. (KCG) canceled an appearance at a brokerage conference this week as shares of the market-making firm surged for a second day on speculation it will be acquired.
The Jersey City, New Jersey-based company is no longer scheduled to take part in a panel sponsored by Keefe Bruyette & Woods Inc. on Nov. 29 in New York, according to Kara Fitzsimmons, a spokeswoman. She declined to comment further. A person with direct knowledge of the matter said Nov. 25 that Knight expects to receive proposals to buy the company from at least two competitors.
Speculation Knight will be bought has sent its stock to the biggest two-day rally in more than four years, rising 19 percent to $2.97. Knight hasn’t traded above $3 since Aug. 9, the week six financial firms rescued it from the brink of bankruptcy by providing cash to restore its capital after the company lost $457 million in a trading malfunction.
Getco LLC in Chicago and New York-based Virtu Financial LLC are likely bidders for Knight, according to the person, who spoke on condition of anonymity since the negotiations are private. Knight could be worth as much as $1.37 billion, or $3.74 a share, based on a sum-of-parts valuation, KBW analyst Niamh Alexander wrote in a Nov. 25 note to clients.
The company is probably worth $3.09 a share, or about $1.1 billion, based on $750 million for the market-making business and $350 million for the electronic execution unit, Christopher Allen, an analyst at Evercore Partners Inc. (EVR) in New York, wrote in a Nov. 25 note. He raised his forecast for the stock to $3.
Knight expects offers this week with negotiations for an acquisition occurring as early as next weekend, according to the person with knowledge of the matter.
While the value of Knight’s shares trading publicly is about $500 million, its equity is worth roughly twice that when convertible securities granted to its rescuers in August are included.
Getco, Virtu and Knight are designated market makers on the New York Stock Exchange or NYSE MKT. After Barclays Plc, Getco is the largest by the number of companies it represents on the Big Board, according to NYSE Euronext. Knight is the fourth biggest. Virtu has the most companies on NYSE MKT, formerly known as the American Stock Exchange, and a few NYSE corporations. Knight is the second-largest designated market maker on the MKT exchange.
In the first half of this year, Knight’s market-making unit posted pretax earnings of $51.1 million, or 86 percent of the company’s total, according to a statement. Institutional sales and trading generated $7.2 million in the first six months of this year. Electronic execution services had pretax earnings of $23.6 million while the company’s corporate division had a loss of $22.5 million before taxes.
Knight spent the last decade expanding from a market maker that mainly handled orders from individuals sent by brokers to a financial services company with institutional clients, electronic trading services, and businesses in fixed income and currencies. The company provides research and asset management and got into the reverse mortgage business in 2010.
It acquired Hotspot FX, the foreign-exchange trading platform, in 2006, and could sell it to an exchange, Allen of Evercore Partners said. It also owns 19.9 percent of Direct Edge Holdings LLC, which operates two U.S. equities exchanges.
Knight’s future value “would depend on what the private businesses look like, what actions they’d take to improve profitability in the other Knight businesses and what would be their capital-return plans going forward,” Allen said.
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