By Jonathan Spicer and Paritosh Bansal
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As per a tentative plan, MF Global's holding company would file for bankruptcy protection and derivatives trader Interactive Brokers would buy the assets, the Wall Street Journal and the Financial Times reported.
Interactive Brokers would likely make an initial bid of about $1 billion during a court supervised auction, the Journal said.
MF Global, the U.S. futures brokerage run by former Goldman Sachs <GS.N> Chief Executive Jon Corzine, has been struggling over the past week in which it posted a quarterly loss, its shares fell by two-thirds and its credit ratings were cut to junk.
The company is suffering because of low interest rates and bets it made on European sovereign debt, making it possibly the most prominent U.S. casualty yet from the eurozone debt crisis.
MF Global was in talks on Sunday with possible buyers, aiming "squarely" to do a deal, though all options remained on the table as the firm hired restructuring and bankruptcy advisers, sources familiar with the situation told Reuters.
The New York Times reported in its electronic edition that by Sunday evening, the talks had narrowed to one bidder, Interactive Brokers.
Sullivan & Cromwell's restructuring and mergers teams have joined the long roster of those advising MF Global, one source familiar with the situation said.
Weil, Gotshal & Manges was also hired to prepare potential restructuring options, a second source familiar with the situation said. The sources could not be identified by name because the talks were not public.
Weil would focus on MF Global's UK subsidiary if it needed to pursue a formal restructuring overseas, the Journal reported in its electronic edition.
The securities company also has hired firms Skadden, Arps, Slate, Meagher & Flom, the newspaper said.
MF Global and Interactive Brokers declined to comment. The law firms could not be reached immediately for comment.
A number of interested parties were considering several possible deals, including buying all or parts of MF Global, said the source, who requested anonymity.
"The goal is squarely for some sort of M&A transaction," the source said, adding the situation was "fluid."
Corzine, who became CEO in March last year after a term as New Jersey's governor, has been trying to transform MF Global from a brokerage that mainly places customers' trades on exchanges into an investment bank that bets with its own capital.
The plunge last week in MF Global's corporate bonds to distressed levels, and in its shares to below $1 at one point on Friday, makes it all the more urgent for the company to come up with some sort of solution before markets open on Monday.
MF Global has given potential buyers limited information about its financials and has not set up a data room for bidders to conduct due diligence, a buyside source earlier said.
The source, who is looking into deals both for the whole company and for its parts, said he was skeptical about the possibility of MF Global striking a deal over this weekend.
The company's positions are big and hard to value, especially the firm's sovereign risk exposure, the source said.
"How do you put a price on that? How do you get a deal done when the right side of the balance sheet keeps moving so dramatically?" the source said.
REACHING OUT TO BANKS
The company hired boutique investment bank Evercore Partners Inc <EVR.N> to help find a buyer, separate sources said this past week.
It reached out to banks including Barclays Plc <BARC.L>, Citigroup Inc <C.N>, Deutsche Bank <DBKGn.DE>, Jefferies Group Inc <JEF.N>, JPMorgan Chase & Co <JPM.N>, Macquarie Group Ltd <MQG.AX>, State Street Corp <STT.N> and Wells Fargo <WFC.N>, a source familiar with the situation said on Friday.
Macquarie has shown interest in MF Global, but a source with knowledge of the development said he would be surprised if Macquarie did a deal immediately. The source was not authorized to speak to the media and thus declined to be named.
A Macquarie spokeswoman declined comment.
Private equity firm J.C. Flowers, which has a stake in MF Global, is also in talks about possibly taking it private, the Wall Street Journal reported on Friday.
The investment is the latest to go sour for the financial services-focused buyout shop, founded by ex-Goldman banker J. Christopher Flowers.
Earlier this year, the firm was among investors who failed to block the nationalization of German mortgage bank Hypo Real Estate.
MF Global, which runs a Futures Commission Merchant and a broker-dealer, was scrambling last week to reassure customers about its stability as signs grew that some of them were withdrawing money.
A drop in a broker's credit rating to junk erodes confidence in its creditworthiness and can then restrict its ability to borrow -- the bedrock of any financial institution -- and fund day-to-day operations.
(Additional reporting by Caroline Humer and Nick Brown in NEW YORK, Tom Hals in WILMINGTON, Jessica Hall in PHILADELPHIA and Narayanan Somasundaram in SYDNEY; Editing by Dale Hudson, Vinu Pilakkott and Muralikumar Anantharaman)