TMX engulfed in bidding war

The patriotism-tinged proposal comes from Maple Group Acquisition Corporation, a corporation formed by five of the country’s largest pension funds and four Canadian bank-owned investment dealers, that has submitted a proposal to the board of directors of TMX Group Inc., owner of the Toronto Stock Exchange and Montreal Exchange derivatives system, to acquire all of its issued and outstanding shares.

“As like-minded investors, we believe there is an opportunity to create significant value by capitalizing on TMX’s strengths to build a stronger integrated exchange and clearing group – and by doing so, to secure the future growth and ongoing integrity of the Canadian capital markets,” said Luc Bertrand, vice-chairman of National Bank Financial Group, speaking on behalf of Maple investors. “We believe our offer constitutes a superior proposal under which shareholders would receive cash, plus the opportunity to continue to participate in the company’s ongoing growth. We welcome the opportunity to work with TMX’s board and management to capture the benefits of our proposal for the company and all of its stakeholders.”

Under the proposed deal, upon completion of the transaction, existing shareholders of TMX Group would own approximately 40%, while the banks (National Bank of Canada , Toronto-Dominion Bank , Canadian Imperial Bank of Commerce , Bank of Nova Scotia) would own approximately 25% and the remaining 35% of TMX would be owned by pension funds which include the Ontario Teachers’ Pension Plan, the Canada Pension Plan Investment Board, Alberta Investment Management Corp., the Caisse de dépôt et placement du Quebec, and the Fonds de solidarité des travailleurs du Quebec.

No shareholder of Maple would own more than 10% of Maple’s total shares outstanding, consistent with the existing regulatory framework.

The Maple group intends to combine TMX Group with Alpha Group, a competing trading system, and Clearing and Depository Services Inc. (CDS) Inc., Canada’s national securities depository, clearing and settlement agency, as soon as possible following the completion of the acquisition of TMX Group.

Both pension funds and the banks are in on the deal for reasons that go beyond the flag-waving Maple Group’s perceived patriotism premium. Canadian banks have a significant equity ownership interest in both Alpha Group and CDS and clearly stand to benefit were the two fold into TMX. The merged entity will also mean pension funds get a high return on their investment.

The new bid, if taken seriously by TMX, can pose regulators the challenge of choosing between a TMX with foreign-controlled component, resulting from the LSE merger, and an all-Canadian ownership with a monopolistic silo-model.

“If the banks are successful they will have control of the financial markets lock, stock and barrel,” said Mike Bignell, president of Omega ATS, an alternative trading system for Canadian exchange-listed equities and fixed income instruments. “No one can predict the outcome but history has shown it is risky to place power in the hands of a few. Innovation is key to our financial markets in ensuring the end investor gets the best possible deal – it needs to be questioned whether moving back towards a more monopolistic structure is the best way to achieve this.”

So far the officials at TMX, at least in public, have been making optimistic noises about the trans-Atlantic deal, giving the imprecision that they are unlikely to ditch the LSE at the alter.

At the recent Bloomberg Canada Economic Summit, in Toronto, TMX’s CEO Thomas A. Kloet had expressed confidence that the TMX-LSE merger will go through.

“We believe that it’s the right deal for the Canadian capital markets and for our institutions or investors,” said Kloet. “For the community as a whole, I think it’s the best deal they can [expect] and for us it’s going to help accelerate the realization of our business plan.”

Maple’s vision for TMX Group includes a better and more competitive business in the future.

“We have put forward a path to building on [its existing] strength to create a stronger, integrated and clearing exchange for equities, stocks, bonds and derivative; this is a proven business model and may I add a very successful one,” said Bertrand.

The new bid has evoked strong responses on both sides of the pond using up plenty of column inches in the international media.

In an interesting observation, a report in the Financial Times suggested some countermeasures that will keep the LSE from getting “swiftly outgunned in a shoot-out by the banks and pension funds comprising the Maple Group consortium.”

Start with a Canadian CEO for the merged entity with Xavier Rolet, CEO of LSE as its president, it said. There was a suggestion that the board could feature more TMX directors and fewer LSE representatives. And here’s the kicker: “The Anthem O’ Canada! might be sung (in English, French and Inuktitut) at the start of trading everyday at Paternoster Square [the location of the London Stock Exchange].”

If Maple’s bid comes to naught, it could become a takeover target itself, speculates The Guardian. The report said the rival offer could well succeed given the Canadian banks’ considerable firepower and national sentiment backing them.

It further quoted Keith Baird of Oriel Securities, an advisory firm in London, England, as saying: “If the counter offer succeeds, as it might well do, it would be a severe blow for the LSE’s response to global exchange consolidation and specifically the NYSE/Deutsche Borse. The LSE’s strategy of diversification away from dependence on London (and to lesser extent Milan) and securing extra growth would be badly damaged.”

Comparison with a similar silo-styled $11.3 billion hostile bid from Nasdaq OMX Group and Intercontinental Exchange (ICE) for NYSC Euronext are inevitable. The NASDAQ/ICE bid was reportedly dropped this morning among anti-trust concerns.

“We don’t think ICE and NASDAQ are a comparable transaction to our transaction,” said Bertrand in a conference call this morning. “First, primary anti-trust concern around NASDAQ and ICE appears to be around listings. We wish to state that Alpha doesn’t currently offer listings services. Secondly, ICE and NASDAQ are two major globally recognized exchanges, whereas Alpha provides relatively limited services in ETFs, specifically the service for trading equities.”

Canada has a unique regulatory environment from both securities and competition perspectives and that all aspects of the TMX business is subject to public interest oversight by the securities commissions, he added.

Incidentally, RBC and BMO, two of Canada’s Big Five banks chose not to be part of the rival bid for TMX. When contacted for an explanation, Rina Cortese, director, media relations, RBC, said: “We have no comment.”

| TMX engulfed in bidding war
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