Knight Capital gets $400 million rescue, shares tumble

Mon Aug 6, 2012 7:53pm EDT
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By John McCrank and Angela Moon

NEW YORK (Reuters) - A group of investors rescued Knight Capital Group Inc (KCG.N: Quote) in a $400 million deal that keeps the embattled leader in U.S. equities market-making in business, but comes at a huge cost to existing shareholders.

Chief Executive Tom "TJ" Joyce told Reuters the new investors support him and his management team, but it was too early to tell whether the firm would shrink or keep the same strategy it had before last week's losses.

There were immediate signs the Jefferies Group JEF.N-led rescue gave Knight back some of the market confidence it had lost, as two large brokerages resumed routing orders through the company and new data showed volumes picking up from last week.

Blackstone Group LP (BX.N: Quote), rival market maker Getco and financial services companies TD Ameritrade Holding Corp AMTD.N, Stifel Nicolaus (SF.N: Quote), Jefferies and Stephens Inc purchased preferred shares for what works out to be a 73 percent stake in the company, Knight said.

Knight has been the largest U.S. provider of retail market-making in New York Stock Exchange and Nasdaq-listed stocks, buying and selling shares for clients. As a market maker it also provides liquidity to equity markets by stepping in to buy and sell stocks, using its own capital to ensure orderly activity.

Knight shares closed down 24.2 percent at $3.07. Those who held Knight shares before Monday will feel the pain of the company's rescue the most acutely. The massive dilution that accompanies the deal means their stakes are worth just a fraction of what they were days ago.

Roger Freeman, analyst at Barclays, said the dilution due to the new investment would imply Knight's value is about $1 a share. He has a $3 price target on the stock, but said it was too early to estimate how earnings would be affected in 2013.

Yet Knight co-founder Kenneth Pasternak told Reuters he had no regrets about accumulating hundreds of thousands of shares in the company since last week's disaster emerged, despite having lost money as a result of Knight's rescue. He retired from Knight in 2002.   Continued...

A trader stands by the post that trades Knight Capital on the floor of the New York Stock Exchange August 3, 2012. REUTERS/Brendan McDermid