The Preliminary Knight Capital Math – Why Pay More for KCG Than C or BAC?

Knight Capital (thankfully) lives to see another day. The post-investment tangible book value per share seems to be roughly $2.85/share. You can buy Citigroup or Bank of America for just north of 1/2 tangible book; why buy KCG at a premium to BAC or C?

Here’s the  Initial Math:

NEW SHARE COUNT

  • $400 million capital raised (in the form of convertible preferreds);
  • Which is Convertible @ $1.50/share for 70% of KCG;
  • Implies 266.7 million new shares in the event the new stakeholders convert;
  • Diluted weighted avg shares PRE-capital raise = 92.9 million shares
  • So Total New Shares = 359.5 million

TANGIBLE BOOK VALUE (as of 6/30/2012 unless otherwise)

  • Equity  = $1.50 billion
  • Goodwill = $0.34 billion
  • Intangibles = $0.09 billion
  • Goldman Sachs Liquidation Fee = $0.04 billion (This is a guess)
  • Tangible Book Value = $1.02 billion

ADDITIONAL CONSIDERATIONS

  • Though KCG is not a bank (nor a “TBTF” entity), the fact it could go out of business in less than one hour suggests the risk profile eerily resembles  a Citigroup or Bank of America…
  • Did talent at KCG leave? Or are they leaving?
  • What’s the legal liability in $ terms?
  • Isn’t the earnings impaired for the forecast-able future, due to loss of customers, loss of credibility, etc.?
  • Fixing mistakes is operationally costly… the unforeseen operational costs of improving code, compliance, etc. also weigh against future earnings, do they not?
  • KCG has senior secured cash convertible preferred with an initial strike of about $21 due 2015.  Face value is $375 million and they make payments biannually at 3.5%.  Is there a change of control issue here?
  • How much did the emergency 1-day credit line for last Friday cost Knight?
  • It would seem in Knight’s interests to do a 10:1 reverse stock split… Citigroup style.
  • Speaking of Citigroup or Bank of America … C and BAC trade just north of 1/2 tangible book value… WHY PAY MORE FOR KCG THAN C or BAC?

Disclosure: Short KCG via common equity and put options .

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