"MAPLE" Syrup used to glue all the partners...
Four pension funds have joined with banks in the deal, which offers TMX shareholders C$48 a share for the group, 70 per cent of that in cash and the rest in shares, a person familiar with the situation said. For every TMX share held, TMX shareholders would be offered C$33.52 in cash, up to a maximum of C$2.5bn, and 0.3016 of one share in the new TMX entity. TMX shares closed at C$41.75 on Friday.This would give the bank and funds consortium, codenamed “Maple”, 60 per cent of the group, with existing shareholders holding the rest.The funds are Caisse de dépôt et placement du Québec, Ontario Teachers' Pension Plan, Canada Pension Plan Investment Board – which manages Canada’s public pension plan, the biggest in the country – and the Alberta Investment Management Corporation.Banks leading the offer are Toronto-Dominion, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Quebec-based National Bank of Canada.
FT.com / FT Trading Room / Exchanges Consolidation -
By Jeremy Grant in London and Bernard Simon in Toronto
Published: May 14 2011 17:48 | Last updated: May 14 2011 17:48
Canada’s biggest banks and pension funds have tabled a cash and shares bid worth at least C$2.8bn ($2.9bn) for TMX Group in a bid to break up an agreed merger between the operator of the Toronto and Montreal bourses and the London Stock Exchange.
TMX confirmed the approach on Saturday, saying it would consider the offer. LSE, which on Friday reported a sharp rise in pre-tax profits, said it remained committed to its $3bn all-share merger with TMX.
Acceptance of the Canadian offer would deal a huge blow to the LSE’s ambitions to forge a transatlantic merger as a way of safeguarding its future amid a wave of exchange mergers.
It also signals that protectionist forces in Canada rallied to prevent the country’s main bourses from losing their independence, moving to create a “national champion” instead.
Four pension funds have joined with banks in the deal, which offers TMX shareholders C$48 a share for the group, 70 per cent of that in cash and the rest in shares, a person familiar with the situation said. For every TMX share held, TMX shareholders would be offered C$33.52 in cash, up to a maximum of C$2.5bn, and 0.3016 of one share in the new TMX entity. TMX shares closed at C$41.75 on Friday.
This would give the bank and funds consortium, codenamed “Maple”, 60 per cent of the group, with existing shareholders holding the rest.
The funds are Caisse de dépôt et placement du Québec, Ontario Teachers' Pension Plan, Canada Pension Plan Investment Board – which manages Canada’s public pension plan, the biggest in the country – and the Alberta Investment Management Corporation.
Banks leading the offer are Toronto-Dominion, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Quebec-based National Bank of Canada.
It was not clear whether the two banks advising the LSE on the TMX deal, Royal Bank of Canada and BMO, will join the counter-offer.
Luc Bertrand, a former chief executive of the Montreal bourse, would become chief executive of the new TMX group, replacing Tom Kloet, the current chief executive and an American citizen.
In a key move, the banks would also tender their shares in the clearing house for the Toronto Stock Exchange, CDS Clearing and Depository Services, as part of the offer, meaning that if the deal goes ahead the clearer would become part of the TMX Group.
This would turn TMX Group into a “vertical silo” along the lines of Deutsche Börse, CME Group in the US, the SGX Singapore exchange and Bolsas y Mercados Españoles, the Spanish exchange. Such structures often use clearing as a way to defend their business against competitors, giving them stronger businesses and higher stock market valuations.
In addition the alternative share trading platform Alpha Trading – which competes with the Toronto exchange – will be folded into the group, restoring the Toronto exchange’s former near-monopoly in Canadian share trading.
Alpha is owned by the major banks in the counter-offer. Last week it had a market share of 18.1 per cent in trading of Canadian stocks, with the Toronto exchange on 63.2 per cent.
The heavy presence of Canada’s banks as shareholders in the country’s two exchanges could cause concern among banks and brokers that are not part of the Maple consortium. Banks – which are typically among exchanges’ biggest customers – have for years not been owners in exchanges, after a wave of demutualisations transformed exchanges into publicly listed companies with no dominant group of owners.
Banks and brokers that are not part of the Maple consortium may question what this may mean for the pricing power of the two Canadian exchanges, if the country’s biggest banks are both their part-owners and biggest customers.
A second person close to the situation said an announcement from the consortium, could come on Monday.
The development is a bitter blow for Xavier Rolet, LSE chief executive, who had staked much on the success of his proposed merger with TMX to restore the LSE to the top ranks of global exchanges.
When the deal was announced in mid-February, Mr Rolet and Mr Kloet said the combined group would be the world’s largest listing venue for mining and natural resources companies, as countries including Brazil, China and Mongolia look to exploit their natural resources.
The UK and Canadian exchanges also operate large junior markets – London’s Aim and the TSX Ventures board, and share the same legal system and language.
Supporters maintained that the merger would improve Canadian groups’ access to global capital. They also warned that the TMX cannot afford to be sidelined in the accelerating consolidation of global securities trading. Canada would maintain regulatory oversight because the merger involves the exchanges’ holding companies, not the exchanges themselves.
The LSE-TMX camp received a boost in mid-April with the conditional endorsement of the deal by an all-party committee of the Ontario legislature.
However critics of the deal, which included Ontario finance minister Dwight Duncan, had said it was less a merger than a takeover of TMX, which owns the Toronto and Montreal exchanges. Existing LSE shareholders would hold 55 per cent of the enlarged group’s capital, with Mr Rolet as chief executive.
A combined LSE-TMX group, which would have a dual stock market listing and be jointly headquartered in London and Toronto, would be worth just under £5bn ($7.7bn), including debt. It would have a combined 6,700 listings, making it the world’s largest exchange by numbers of companies traded.
TMX investors were to receive 2.9963 ordinary shares in the enlarged group for each share held in TMX. LSE shareholders would own 55 per cent of the enlarged capital, with TMX shareholders holding the rest.
The LSE and TMX only this week submitted their joint applications to four provincial securities regulators for approval of the proposed deal.
One person familiar with the counter-offer said that talks had been “on again, off again” over the past three months.
Some of the banks – notably Toronto-Dominion, Canadian Imperial Bank of Commerce and National Bank of Canada – have led opposition to the LSE-TMX deal, maintaining that the Toronto and Montreal exchanges are national champions that could do much better than aligning themselves with a second-tier overseas partner.
Public opinion has been far less inflamed by the deal than by BHP Billiton’s $40bn bid last autumn for PotashCorp of Saskatchewan. The political backlash in that case forced the federal government to reject BHP’s proposal. Many observers believed that the ruling Conservatives’ resounding victory in a general election earlier this month increased the chances of the LSE-TMX merger being approved.
However, critics took heart from remarks by Mr Duncan shortly after the deal was announced that the Toronto exchange was “a strategic asset in a strategic industry”. Mr Duncan also expressed concern that Dubai would be the biggest shareholder in the merged group. The LSE’s largest shareholder is Borse Dubai.
The banks are unlikely to find universal acceptance for their proposal. They will come under close scrutiny for the virtual monopoly over securities trading that would be created by folding Alpha into the Toronto exchange. Furthermore, Canadians have a love-hate relationship with the banks, respecting their stability while chafing at their economic power.
However the involvement of four of Canada’s biggest pension funds is likely to aid the banks’ campaign to swing public opinion to their side.
Politicians and regulators will be forced to choose between the potential rewards of creating a national champion and the risks of the banks abusing their extra power.
If the counter-offer is accepted, it would mark the return of big banks as shareholders in a large exchange since banks exited from exchanges in a wave of demutualisation that swept through the exchange world a decade ago.
Tom Caldwell, a Toronto securities dealer and whose company, Caldwell Financial, invests in exchanges, told the FT last week that a bid for TMX involving the banks “would be a terrible thing for Canadian markets”, noting that “exchanges should be neutral”.
The move by Canadian institutions to prevent the LSE-TMX deal comes only weeks after the Australian government rejected an attempted takeover by the Singapore exchange for its Australian counterpart, on national interest grounds.
The two developments signal that the current wave of cross-border exchange mergers is starting to fall afoul of nationalist sentiment, with some countries insisting that exchanges are vital national economic infrastructure – unlike airlines.
Copyright The Financial Times Limited 2011
FT.com / FT Trading Room / Exchanges Consolidation - Canadians launch counterbid for TMX