Collins Stewart Tullett, the world's second-biggest inter-dealer broking firm, on Thursday called off talks on a possible take-over, saying negotiations had failed over price.
Shares in the UK-based company were down 7.26 percent at 575 pence at 1538 GMT, valuing it at around 1.1 billion pounds ($1.9 billion), after they had earlier dived as much as 13 percent.
The firm revealed in August that it had received a number of bid approaches, which sources familiar with the matter said had come from three US private-equity firms: Blackstone, Hellman & Friedman, and Kohlberg Kravis Roberts.
"It has become apparent that the terms of any such offer would not satisfy shareholders' reasonable expectations about the valuation of the business. The company has therefore terminated all discussions," Collins Stewart said in a statement.
This is the second time in two days that UK companies have rejected high-profile private-equity bids, after energy group Drax ended talks with a US consortium on Wednesday.
Collins Stewart, headed by Terry Smith, said it would now "pursue other means to deliver value to shareholders".
A source familiar with the matter said this was likely to include taking on debt to leverage up the balance sheet, return cash to shareholders and invest in new products such as electronic broking.
"We believe they need an electronic trading platform and will probably have to acquire one as development could be too lengthy and costly," said Geoff Miller, an analyst at Bridgewell.
Miller said that gearing up the balance sheet would substantially increase the company's risk profile and make the development of an electronic trading platform problematic.
According to the Web site of the UK's Financial Services Authority, Collins Stewart got more balance-sheet flexibility in October when the regulator waived some of its consolidated capital requirements, which had required it to put money aside to cover goodwill on acquisitions.
In the debt market, the company's 150 million sterling bond rallied on hopes the balance sheet would be less geared under the company than under private-equity investors.
Fitch Ratings on Thursday afternoon affirmed its BBB rating on Collins Stewart with a stable outlook, but said it would monitor the board's plans to deliver value to shareholders.
Collins Stewart, which also owns a UK stockbroking business, is second in the inter-dealer business only to rival ICAP Plc, also listed in London.
The broker was potentially attractive to private equity investors because of the cash-generative nature of its business, according to analysts.
The buyers were expected to split Collins Stewart into its inter-dealer broking and stockbroking parts, selling the latter and listing the rest in the United States, where comparable stocks trade at higher premiums and consolidated capital requirements are more favourable.
Analysts had predicted that the bankruptcy of US brokerage Refco would make it more difficult for the Collins Stewart deal to go ahead, because it would raise the cost of capital for private-equity firms. Despite the differences between Refco and Collins Stewart's businesses, the US futures and commodities broking firm's troubles would be used as leverage to force down the valuation, they said.
Collins Stewart may still plough ahead with a listing outside Europe, analysts said. The FSA's capital-requirements waiver will end in early 2007, in time for new EU legislation.
Analysts said Collins Stewart's share price on Wednesday - with the bid premium taken out - was a fair reflection of the company's current value.
Inter-dealer brokers act as middle-men between big banks in the trading of bonds, foreign exchange and derivatives.
Collins Stewart meanwhile said it continued to trade in line with market expectations.
In September the firm reported a 4.3 million pound drop in first-half profits to 39.9 million after acquisition-related costs of 28.6 million pounds. Operating profits were up nearly 50 percent to 68.9 million pounds.
Chief Executive Smith has promised to run naked through the streets of London if the company does not beat last year's profits.
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