TORONTO — A homegrown consortium says its $3.6-billion proposal for TMX Group (TSX:X) is a “truly Canadian” alternative to a controversial cross-Atlantic merger — but it is also one fraught with its own regulatory hurdles and anti-competition challenges.
Maple Group Acquisition Corp. — comprised of four big banks and five pension funds — said Monday that its $48 per share in cash and stock proposal is a “win-win” deal for Canadian capital markets and shareholders in the group that operates the Toronto Stock Exchange.
“It’s truly a Canadian solution,” Luc Bertrand, vice-chairman of National Bank Financial and spokesman for Maple Group, said on a conference call Monday.
The proposal represents a 24 per cent premium over that offered in its potential merger with the London Stock Exchange Group. The Maple Group would also maintain current management, staffing levels and shareholder dividends as a Canadian, publicly traded owner of the exchange.
However, the group’s offer is also raising questions about competition in Canada’s exchange industry.
The acquisition would see about 80 per cent of Canadian trading fall under the group’s control.
Maple’s offer comes as two major U.S. players withdrew their bid Monday for the New York Stock Exchange operator amid anti-competitive concerns — an issue in the Canadian bid that the Competition Bureau said it will investigate.
The proposal also comes after the TMX Group last week filed regulatory documents for its so-called “merger of equals” — technically a foreign takeover by the London Stock Exchange — that has been criticized by the Ontario government, among others, over concerns it could allow foreign interests to dominate Canada’s largest stock exchange.
“There’s no doubt that our offer is significantly superior to the LSE offer,” Bertrand said.
Maple Group’s ambitious plan, announced on the weekend, includes acquiring TMX’s rival Alpha exchange and clearing firm CDS Inc. — which are already partially-owned by the major banks trying to buy the TMX.
The group’s bid is conditional on receiving approval from the Competition Bureau, but Bertrand said he is confident the watchdog will allow the acquisitions to go ahead, paving the way for a bigger and vertically-integrated Canadian-based exchange.
However, Queen’s University economics professor Thor Koeppl said the degree of consolidation proposed in the Maple bid should raise “red flags” for Canada’s competition watchdog.
He questioned how the consortium has been able to offer such a steep premium, saying there is a risk it could by paid for by increased trading fees once competition is reduced.
“Just the threat of having Alpha around keeps trading fees at TMX at bay,” he said.
The potential TMX and LSE merger “spooked” the Canadian banks into action over fears they would lose fees from Alpha and CDS. “That’s the only reason I can explain why the banks are so adamant about a Canadian solution,” Koeppl said.
Bertrand said any review of Canada’s exchange environment must include competition from U.S. exchanges, as major companies that list on the TSX also list on a New York Exchange. He also believes other alternative trading systems will enter the Canadian market and foster incentives to keep trading fees low.
“Someone tells me that there’s no competition,” he said. “I think I can prove there is a lot of competition and it’s an aggressive one, it’s a tough one.”
The company hopes to file a plan of arrangement with the Competition Bureau by late fall.
Bertrand said the Maple proposal would both keep the exchange in Canadian hands and allow it to grow big enough to compete internationally and even pursue global growth — a major point the TMX and LSE have been using to sell their merger to regulators.
The stock exchange industry has been undergoing years of consolidation, resulting in fewer independent regional markets and more large, diverse organizations capable of addressing the global economy.
Earlier Monday, the companies that own the Nasdaq stock market and InterContinental Exchange withdrew their attempt to buy NYSE Euronext — which owns the New York Stock Exchange — after recognizing they would not receive regulatory approval for the transaction and could potentially face a lawsuit attempting to block the deal.
“We don’t think NYSE and Nasdaq is a comparable transaction to our transaction,” Bertrand said.
The anti-competition concerns in the U.S. case centred on decreased competition for listings, but Alpha doesn’t currently list stocks he said, adding that it is nowhere near the size of the international players in the U.S. deal.
Bertrand said he is confident the group will be able to buy Alpha and CDS if it gets approval, although there are two large shareholders in Alpha that are not part of the consortium making the bid.
The group does not include Canada’s biggest bank, the Royal Bank (TSX:RY), or Bank of Montreal (TSX:BMO), which are advisers to the TMX and the London Stock Exchange.
Bertrand said they haven’t yet spoken to those two banks “for obvious reasons” but added the deal is open to other broker-dealers who wish to join in the 25 per cent bank-owned stake.
An independent committee will be set up to negotiate with Alpha and CDS. And the group has put up firewalls to isolate those people involved in the TMX proposal to avoid conflicts of interest.
The banks that are part of the group will be required to hold their TMX shares for five years under lock-up agreements as part of the deal.
Maple’s investors include: CIBC World Markets Inc., National Bank Financial Inc., Scotia Capital Inc., TD Securities Inc., Alberta Investment Management Corporation, Caisse de depot et placement du Quebec, Fonds de solidarite des travailleurs du Quebec, the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan Board.
Teachers earlier supported the LSE proposal but said it reconsidered once the consortium opportunity emerged.
“We believe this new opportunity represents superior value, building as it will on TMX Group’s strengths to create a stronger integrated exchange group,” said Teachers’ spokeswoman Deborah Allan.
If the Maple Group deal succeeds, existing shareholders of TMX Group would own 40 per cent of Maple’s shares, the pension fund investors would hold 35 per cent and the bank-owned investment dealers about 25 per cent. Moreover, no single shareholder of Maple would own more than 10 per cent of Maple’s total shares, consistent with existing regulations.
LSE Group said Monday that it remains committed to its merger with TMX, despite the competing bid.
“The proposal from Maple is not a formal offer for TMX and accordingly there is no certainty that such an offer will be forthcoming,” it said in a statement.
The LSE-TMX deal is subject to approval from various regulatory bodies, including the Quebec and Ontario securities regulators and government approval from Industry Canada under the Investment Canada Act, which must determine whether a merger with a foreign company would be of “net benefit” to Canada.
Stock in TMX Group gained 5.5 per cent or $2.30 to $44.05 Monday on the TSX.