4 options for KCG -BK chap 11, asset sales -Take under at a nominal price(unlikely since shareholders might vote the deal off, uncertainty, 90 days to close). A premium is even more unlikely due the capital needs in addition to the price paid, otherwise the company wont be able to roll over debt(Capital raising is a must, yields on their debt are too high to operate profitably) -Massive dillution(I believe huge dillutions need shareholder approval in some states) -Asset sales with the company alive The last one is the only way with significant squeeze potential, the others probably knock the stock price down a lot right away. Thing is, selling assets at bk is superior to selling in private while alive because of the auctions. So they are likely to fetch a worse price there. It could get idiots buying though on the headlines 'sold xyz division for $100m'. Company has 8-1 assets to tangible equity. Selling stuff at bad prices might not be such a good idea that those idiots think
http://www.osler.com/newsresources/Default.aspx?id=1383&col=10 " For example, both the New York Stock Exchange (NYSE) and Nasdaq require shareholder approval at or above 20% dilution, while the London Stock Exchange threshold is 25%."
Based on the information from today it seems that there are the following options -Financing through some kind of convertible bond(With likely equity as well) -Bk Chap 11 -Asset sales It seems likely to me it will be a mix of option 1 and 3. A piece of information that I couldn't quite understand was Gasperino source talking about raising $200M. This is not enough I'm not sure whythe source said that. They lost $440M if they don't replenish that they will be working with less equity capital then before(less liquidity as well) so they will be weaker as a counter-party and their debt yields will remain high(their ratings will be weaker too). Maybe they can get away with $300M but it seems a gamble people it will give people room for speculation they are not solid enough Now here is the part that the stock bulls don't understand, the market cap of the stock acts as a price barrier towards the recapitalization. If they had to pay say $4.5 a share for the stock they would have to spend $400M and then spend another $300-$400M capitalizing the company. Thats a big price tag to pay a company on the verge of bk. Its not needed as well since the investors hold the cards Stock will not be taken out at a premium, if not bk they will do a dilutive financing. At what price?Since they control the negotiation it will be at a low price. In the end it they will own at LEAST 50% of the company(they will likely want the control premium to dictate who will run the place, they will want to fire the CEO too), likely more than that They will probably combine that with sales of some divisions, the futures brokerage looks like will be sold due regulatory pressure from the CFTC The only scenario that will be good for the stock is if they raise money without a lot of dilution, sell assets at good prices. This is not a likely scenario when you are on the weaker end of the negotiation
Lets say they raise say a small amount, $300M at $362M market cap if they got in at current prices they would own a little less than 50% of the company. But we know that is not going to happen, they will want a big discount. This means they will own more like 70%+ $300M would leave the company less capitalized than before, less liquid than before and with a weaker rating. Its questionable that private equity firms would want to invest in this without a bigger margin of safety(bigger discount)
As a short, the only scenario I'm worried about is if they raised $200M a good prices and sold assets at good prices too in a way that increased book value(equity). In this situation maybe the current shareholders won't do so badly but if they sold the 'crown jewels' at good prices, I'm not sure who would invest $200M without wanting a large discount and control premium
Best case scenario for KCG that I can see. They raise $200M, sell some assets which raises another $50-$100M. The equity raising ends up giving 51% of the stock to the new investors. Current shareholders will own 49%. The company is worth something like $500M(But with the asset sale, it will be less, specially if its a crown jewel like their market making division). 49% of $500M = $245M of value or $2.75 per share of the current stock. Stock would be overvalued by 31% in this scenario. Everything else the stock plunges huge
I suppose a scenario that could happen that would be good for the stock is if the company just sold assets like crazy, essentially a chap 7 over a weekend outside bk. Company has 8-1 in assets over tangible equity, can they sell everything in 1 weekend and still justify the $362M in market cap?I don't think so. There is a reason why bk exists, it tend to maximize the value everyone gets for the assets, a fire sale will likely yield a even worse outcome than bk If KCG becomes a GGP in fire sale in 1 weekend then I'd consider simply myself as unlucky and take my losses on monday
Similar experience on several stocks. You spot a fraud, short, news gets out, news conference which admits with a smiley face, stock goes up, tying up capital for years. When the price finally get low, playing chicken with the halting and delisting process; otherwise, tied up again through the reorg. I like the closure that options provide to this trade, but, in addition to the long duration, I have my doubts that in the death throes that the volatility won't matter more than direction.