Knight Debacle Leaves Blackstone Winner

Chidem Kurdas

First came the trading system error that led to a $440 million loss at Knight Capital. The stock tanked. Knight made an emergency deal with a consortium of Wall Street firms, which agreed to buy $400 million in Knight convertible stock.

Charles Gasparino at Fox Business reported that before the trading loss Blackstone Group was about to pay $1.2 billion – orders of magnitude higher than the market cap after the loss – to take Knight private and Jeffries used Blackstone’s due diligence  to put together the rescue deal.

At that point there were media comments that Blackstone had a narrow escape but lost out on all that due diligence work it had done. Not at all. On the contrary.

Blackstone was a member of the consortium and emerged with a 10.5% stake in Knight as part of the deal. It received convertible shares that can be turned into common stock at $1.50 a share. Right now Knight is trading around $2.89 a share. That means roughly speaking Blackstone is ahead by 90% on its Knight investment on the books, as are other members of the consortium. And likely the stock will recover further.

This appears to be distressed investing at its most nimble, taking advantage of an opportunity offered by a sudden reversal. The rescuers are in for a tidy gain. Or am I missing something?

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