MF Global Holdings Inc. is seeking a buyer for its futures brokerage unit and is looking to strike a deal within days, said two people with knowledge of the matter.
MF Global has been contacting large banks already in the futures business, said the people, who spoke on condition of anonymity because the talks are private. Under the plan being discussed, the New York-based company’s holding company and other businesses wouldn’t be included in the sale, the people said.
The firm’s futures unit could sell for around $765 million, equivalent to $4.60 per diluted share, Niamh Alexander, an analyst with KBW Inc. in New York, wrote in a note to clients today. She estimated the futures unit accounted for $1.02 billion of group tangible book value, which includes the firm’s broker-dealer unit, and could sell for 75 percent of that.
“We think that any of the big dealers could relatively easily tuck this business into their own portfolios,” Alexander wrote. “We believe private equity is very interested in businesses with touchpoints to retail and high net worth clients.” Alexander noted that privately held futures broker R.J. O’Brien has investors that include private-equity firms.
Diana DeSocio, an MF Global spokeswoman in New York, declined to comment.
Fitch Ratings cut its grading of MF Global to BB+, the highest junk status, from BBB today, citing the challenges of earning profits from interest in the current “low interest rate environment.” The Federal Reserve target on overnight loans has been between zero and 0.25 percent since late 2008 and Fitch said “that is expected to last over the medium term.” The ratings company also noted MF Global’s increased proprietary trading.
“These increased risk taking activities have resulted in sizeable concentrated positions relative to the firm’s capital base, leaving MF vulnerable to potential credit deterioration and/or significant margin calls,” the company wrote.
Chief Executive Officer Jon Corzine, 64, who helped run Goldman Sachs Group Inc. from 1994 to 1999, increased the firm’s risk and used its own money to trade, including investments in European sovereign debt. Corzine began adding obligations of Italy, Spain, Belgium, Portugal and Ireland about a year ago, according to a company presentation. The positions accounted for 16 percent and 12 percent of net revenue in the quarters ended in March and June, the firm said.
Moody’s Investors Service cut MF Global’s ratings to Baa3 from Baa2, one level above junk status, on Oct. 24, citing its holdings of European sovereign debt and inability to hit earnings targets. This week, the firm reported its biggest quarterly loss ever, shares plummeted 54 percent and the firm’s 6.25 percent bonds issued in August fell into distressed levels.
MF Global, the former brokerage unit of London-based Man Group Plc that went public in July 2007, is getting advice from Evercore Partners Inc. as it seeks buyers for the brokerage unit and examines other options, the people said.
This week, the firm’s shares have plummeted 55 percent and 6.25 percent bonds issued in August fell into distressed levels.
MF Global fell 8.8 percent to $1.55 as of 1:29 p.m. in New York.
Goldman Sachs, JPMorgan Chase & Co., Deutsche Bank AG, Bank of America Corp. and Citigroup Inc. are among the largest banks with futures commission merchant units, according to data compiled by the Commodity Futures Trading Commission.
‘Spreads Got Crushed’
MF Global’s futures unit earns interest income from the collateral it holds to back its customers’ trades. Corzine said earlier this week low rates make that business challenging.
“They have not made money in the last few years because the spreads got crushed with interest rates” so low, Alexander said in a telephone interview. MF Global earned $113.2 million in interest income in the quarter ended in September. When rates were at 5.25 percent in 2007, the company earned $1.77 billion in the quarter ended in March. MF Global also earns fees for brokering trades at futures and options exchanges.
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