Trading firm Getco Holding Co offered to merge with Knight Capital Group Inc to create one of the largest U.S. market makers for stocks and options.
Getco's two-step deal values the combined company at $1.4 billion, sources familiar with the offer said.
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The combined firm would be publicly traded and would be headed by Getco Chief Executive Daniel Coleman; Knight CEO Tom Joyce would become chairman of the board, Getco said in a letter to Knight on Wednesday.
A deal is by no means certain. Sources familiar with the situation previously said Virtu Financial LLC was also interested in Knight for its market-making operations. Virtu's plans could not be learned on Wednesday.
The Getco offer was disclosed in a filing with the U.S. Securities and Exchange Commission. The filing included an offer letter to Knight directors.
Knight, 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, acknowledged receiving the offer but did not comment further.
A Getco spokeswoman declined to comment beyond the regulatory filing.
Getco's offer would value the combined company at $3.50 a share, the sources said. 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 press reports. Knight shares were up 12.5 percent in morning trading Wednesday.
Knight 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 company, on the brink of bankruptcy, was forced to take on new investors.
Getco was one of the firms involved in a $400 million rescue of Knight, which was led by Jefferies Group . Others included Blackstone Group LP , Stephens Inc and financial services companies TD Ameritrade Holding Corp and Stifel Financial .
As part of the deal, Getco investor General Atlantic, as well as Blackstone and TD Ameritrade, were given seats on Knight's board. Getco currently owns 23.8 percent of Knight's stock, according to a U.S. Securities and Exchange Commission filing.
Chicago-based Getco is the No. 2 designated market maker at the New York Stock Exchange with more than 850 listing assignments.
The combined company would be a market maker and an agent for trades across a range of markets and assets. The deal would add Knight's consumer franchise to Getco's industry technology, Getco said in its letter to Knight's board.
Besides being a top U.S. 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.
Getco is proposing a two-step deal. The first 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."
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 37 cents to $3.34 in morning trading on the New York Stock Exchange.
(Reporting By David Henry in New York; Editing by Paritosh Bansal, Gerald E. McCormick and John Wallace)