KCG Accepts Virtu’s Terms
Capping a quick 36-day process, KCG Holdings has agreed to Virtu Financial’s unsolicited $1.3 billion bid, its leadership announced during its first quarter earnings call.
“KCG’s Board of Directors concluded that the proposal from Virtu provides compelling value for KCG’s stockholders,” said Charles Haldeman, KCG Holding’s non-executive chairman. “Further, the combination of Virtu and KCG will create a true industry leader with greater diversification and scale.”
The deal is not the first time that Virtu has acquired a competitor. Virtu bought fellow electronic market maker Madison Tyler Holdings in 2011.
Virtu and KCG Holdings expect to close the all cash sale sometime in the third quarter after KCG stockholders vote to approve the transaction and the transaction clears all regulatory requirements.
Under the terms of the deal, former Nasdaq CEO Robert Greifeld and Silver Lake founder Glenn Hutchins will join Virtu’s board of directors.
To finance the purchase, Virtu has obtained a commitment from J.P. Morgan Securities to provide up to $1.65 in debt financing.
Virtu expects to recoup $208 million in cost savings from technology, communications, and data processing consolidation ($70 million); occupancy, overhead, and redundancies ($180 million), and foregone revenues ($42 million) as well as $440 in capital synergies.
Virtu also plans to rationalize non-core business and trading strategies that do not earn sufficient returns, according to a slide presentation on the deal published by Virtu.
The broker-dealer looks to release a majority of this capital within the first year and be back to its pre-acquisition capital structure, 2.5 times EBITDA, in 2019, according to the presentation.
“Virtu has been very effective at running a lean market making business in an increasingly competitive, low-volatility market,” noted Brad Bailey, research director, securities & investments at industry analysis firm Celent.
Virtu officials have modeled its post-purchase net revenue streams on a pro forma basis, and they expect that market making will represent revenue from market-making 78% of its revenue down from 98% before the purchase. Technology and execution, which did not appear in Virtu’s pre-deal allocation should make up 19% of net revenues while the remaining 3% of revenues are attributed to “other sources.”
Within its market-making operation, company officials envision Americas equities representing 47% of net revenues on a pro forma basis, which would be up 25% from its pre-purchase revenue allocation. They also expect that the revenue share from non-U.S. equities to fall to 11% from 42% while Global FICC trading would shrink to 20% from 34% as well.
When it comes to “non-core” businesses, some industry watchers say Virtu official may be referring to KCG Holdings’ KCG BondPoint credit alternative trading system and KCG MatchIt equities ATS.
Celent’s Bailey sees value in the KCG BondPoint business, which KCG inherited from Knight Capital which originally acquired the credit trading platform ValuBond in 2006 before rebranding it as Knight Bond and then relaunching it as Knight BondPoint in 2008.
“It runs pretty independently under KCG, and it has tried to expand the type of business it is doing,” he said. “It is a unique property out, and if Virtu decides to spin it out, I think there would be a lot of demand for an electronic credit platform with the type of liquidity and market structure that it has.”
Unlike the wealth of available equities ATS platforms, there is a much smaller pool of credit ATSes, according to Bailey.
“There’s KCG BondPoint, TMC Bonds, and BondDesk, which Tradeweb acquired,” he said. “Something like KCG BondPoint would be interesting for to a lot of people. The question is: Does Virtu want to be in the platform business?”