JERSEY CITY, N.J., Mon Aug 6, 2012 – A group of investors will rescue embattled market maker Knight Capital Group Inc. in a $400 million deal that keeps the company in business, Knight said on Monday, but comes at a huge cost to investors.
The New York Stock Exchange said it will temporarily transfer Knight’s market-making responsibilities on more than 500 stocks – and related Knight employees – to Chicago-based Getco, until the recapitalization is complete. The exchange said both companies cooperated with the transfer.
The rescuing companies will buy convertible preferred stock with a 2 percent dividend to save Knight, which was brought to its knees last week by a software glitch that caused errant trading in dozens of stocks. The deal is expected to close later Monday morning.
The preferred shares are convertible into about 267 million shares of common stock, Knight said in a U.S. Securities and Exchange Commission filing, implying the investors would get a stake of a little more than 70 percent in the company.
The filing did not name the investors. On Sunday, sources familiar with the talks identified private equity firm Blackstone Group LP, Getco and financial services companies TD Ameritrade Holding Corp., Stifel Nicolas, Jefferies Group Inc and Stephens Inc. as the prospective buyers.
J.P. Morgan analyst Kenneth Worthington, in a client note after the initial reports on the rescue Sunday night, said the deal presaged Knight’s eventual breakup.
“We don’t expect investors to value Knight as an ongoing entity given its technology glitch generated a pre-tax loss equal to (about) 30 percent of shareholders equity and nearly wiped out the company in just 30-45 minutes of trading,” he said.
Shares fell 30 percent to $2.85 in heavy premarket trading after closing at $4.05 on Friday. Less than three weeks ago Knight traded for m