TMX Group (TSX:X) received a key endorsement for its proposed merger with London Stock Exchange Group on Thursday as the bidding war for control of the operator of the Toronto Stock Exchange heated up.
Shareholder advisory firm ISS has recommended shareholders back the friendly deal, saying the rationale for the merger appears to be sound, while a rival offer from Maple Group would saddle the company with more debt.
“Given that the Canadian-bound strategic vision driving the Maple Group offer is no more compelling than that of the broader LSE transaction, yet the high leverage alone carries significantly more structural and strategic risk, there is little incentive for shareholders to take that alternate course,” ISS said.
ISS noted that debt that will be piled on under the offer by Maple makes it more complicated to compare the deals.
“Put another way, the riskiness of the business increases as the leverage increases and equity values will respond accordingly,” ISS said.
“So while it may be the case that current TMX shareholders can exchange a 30 per cent ownership in TMX for a 41.7 per cent ownership in the new TMX holding company, the capital structure of the new holding company raises significant questions about whether they have gained or lost in the translation.”
In a bid to help convince investors to vote for the LSE deal, TMX said Wednesday that it would pay a special dividend of $4 per share.
The company also promised that it would continue to pay a dividend at least equivalent to the current quarterly rate of 40 cents per TMX share, instead of an earlier plan that would have seen TMX shareholders take a hit.
Maple Group responded by increasing its stock and cash offer to $50 per share, up from $48, and increasing the amount of cash available under the proposal.
TMX shares were up $1.04 at $45.29 at the Toronto Stock Exchange on Thursday afternoon.
London Stock Exchange chief executive Xavier Rolet said the merger is all about future growth and the special dividend is based on that plan.
“What we are doing is we are giving a downpayment on that future growth to existing TMX shareholders and LSE shareholders,” Rolet told cable business news channel BNN on Thursday.
“We wanted to commit with hard cash.”
TMX shareholders vote on the proposed merger with the London Stock Exchange Group on June 30.
Currently, members of the Maple consortium collectively hold a roughly 6.55 per cent stake in TMX.
The endorsement by ISS follows a recommendation last week by shareholder advisory firm Glass, Lewis & Co. that said shareholders should also support the Toronto-London merger.
Under the Maple bid, the consortium has offered to buy up to 80 per cent of TMX shares for $50 in cash each. That would be followed by a stock swap for the remaining shares that would see TMX shareholders end up with a minority stake in Maple.
Maple has set a minimum requirement of 70 per cent of the TMX shares be acquired for cash, a threshold that would see TMX shareholders hold a 41.7 per cent stake in Maple. If the 80 per cent maximum percentage of shares are tendered for cash, TMX shareholders would hold a 27.8 per cent stake in Maple.
Investors in the Maple consortium would hold the remaining interest in the company.
The Toronto-London merger deal would see TMX shareholders receive 2.9963 shares in the new company for each TMX share to give them a roughly 45 per cent stake in the merged stock exchange operator.