By John McCrank and David Henry
(Reuters) - Getco Holding Co proposed a $1.4 billion deal that would see it merge into Knight Capital Group Inc
The main attraction for Getco and Virtu, both trading firms, is Knight's U.S. market-making business, which uses computer models to match buy and sell orders in stocks and options and executes around 10 percent of U.S. equity trading volume.
But the approach of the two firms to a deal with Knight differ, and it remained unclear which - if any - would be able to clinch a deal. Knight's shares were up 13.5 percent in afternoon trading on the New York Stock Exchange.
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 combined firm would be publicly traded, which would allow General Atlantic, which invested in Getco in 2007, to take the firm public. Getco also 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 take it private, 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, an investor in Virtu, would be a backer of such a 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 month of 2012, Knight's U.S. market-making unit traded an average of 3 billion shares a day.
Besides being a market maker, Knight runs bond and foreign exchange trading platforms and owns a reverse mortgage lender. It also holds a stake of about 20 percent in Direct Edge, the No. 4 U.S. cash equities exchange.
Knight acknowledged receiving Getco's offer but did not comment further.
The bidding for Knight comes months after the firm had to be rescued over the summer by Getco and other investors. It suffered a trading loss of $440 million in August due to a software glitch that unleashed a flood of orders to the New York Stock Exchange.
The rescue was led by Jefferies Group
As part of the deal, General Atlantic, Blackstone and TD Ameritrade, were given seats on Knight's board.
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. The first step would involve Knight buying Getco in exchange for 242 million newly issued shares and warrants, with different strike prices, to buy an additional 69 million shares.
In the second step, the combined entity would launch a tender offer to buy up to 154 million shares at a cash price of $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 from a "large financial institution."
Knight CEO Tom Joyce would become chairman of the board under the terms of the proposed deal. The Getco proposal also calls for four directors of the new company to be nominated by Getco shareholders. Sources said Getco is ready to proceed with the deal as early as December 3.
Knight shares were up 40 cents to $3.37 in afternoon trading on the New York Stock Exchange.
(Reporting By David Henry in New York; Editing by Paritosh Bansal, Gerald E. McCormick, John Wallace and Tim Dobbyn)