(Reuters) - 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 on Wednesday.
Knight's (KCG.N) 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 stock."
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 glitch.
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 November 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 said.
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 JEF.N, and also included Blackstone Group LP (BX.N), Stephens Inc and financial services companies TD Ameritrade Holding Corp (AMTD.N) and Stifel Financial (SF.N).
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 December 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.