Rival bidders for TMX Group have a month to win over shareholders

TORONTO — The Canadian bidder for the country’s largest stock market operator is confident shareholders will favour its $3.6-billion offer over a transatlantic merger that’s preferred by the board of TMX Group, but its rival isn’t fazed that the hostile bid could derail its plans.

TORONTO — The Canadian bidder for the country’s largest stock market operator is confident shareholders will favour its $3.6-billion offer over a transatlantic merger that’s preferred by the board of TMX Group, but its rival isn’t fazed that the hostile bid could derail its plans.

Maple Group Acquisition Corp. spokesman Luc Bertrand said Thursday the group is comfortable with its decision to go around the TMX (TSX:X) board and directly to shareholders, but he also “sincerely hopes” the operator of the Toronto Stock Exchange will change its mind and consider the offer.

“We were hoping to have that opportunity to explain it to the board, but they closed the door on us — they categorically refused to have a discussion, formally or informally,” Bertrand said in an interview.

TMX Group responded late Thursday to the Maple press release by saying it doesn’t change any of the terms that had already been rejected and complaining that Maple’s statement didn’t have all of its facts straight.

The TMX, which also owns the Montreal derivatives exchange, TSX Venture Exchange and other markets, said last week that the Maple bid breeds too many uncertainties, including regulatory and debt risks. Instead, it is pushing ahead with a merger with the London Stock Exchange Group.

“Given that there were no changes communicated in Maple’s press release from yesterday, TMX Group continues to be prohibited by the merger agreement from any discussions with Maple or its advisors,” TMX said Thursday.

“The board will review and respond to the formal Maple offer if and when it has been made.”

TMX also disputed Maple’s assertion that a shareholder vote on the TMS-LSE merger had been accelerated, saying the June 30 date is within the previously announced time lines.

That leaves Maple — which has yet to mail its $48 cash-and-share offer to shareholders — a month to convince TMX shareholders that the Canadian bid is superior.

The LSE also fired back at its rival for the TMX Group on Thursday, saying that Maple — a nine-member group of Canadian banks and pension funds — is persisting with a hostile bid, even though it has been rejected by the board.

But Bertrand said he resents the implication that the bid is “hostile” because it is the TMX that is being unco-operative.

“We are not hostile because we are keeping our door wide open to have discussions with the TMX board.”

The war of words comes after the TMX board announced a shareholder vote would be held June 30 on its proposed deal with the LSE.

Shareholders have become the key battleground in determining the future of the Canadian capital markets operator. Both bids are fraught with regulatory risks and could leave the exchange with less-than-ideal ownership structures.

The Maple bid would create a trading monopoly in Canada, while the LSE “merger of equals”, technically a takeover by the British exchange operator, would leave voting control in the hands of a foreign owner.

Shareholders must make their decisions on the two bids before they know whether either will receive the regulatory approval they require.

LSE Group chief executive Xavier Rolet said he is not threatened that shareholders may accept the Maple bid — something he called “a retrenchment into a monopolistic model” that shouldn’t pass regulatory reviews.

The Maple bid represents a 24 per cent premium to the implied value of a merger with the London Stock Exchange, but only $33.52 of the bid is in cash — which Rolet said was a 25 per cent discount to the current TMX group price. Its shares closed at $44.26 Thursday on the TSX.

The rest of the value of the bid would come from a share in the new group, a proposed integrated trading system that relies on an acquisition of the bank-owned alternative stock exchange Alpha Group and the CDS clearinghouse — a process it has not yet started.

“The rest is highly risky, highly uncertain its condition on acquiring two additional companies … we don’t even know at what value or what price these companies are going to be added,” Rolet said.

“Somebody’s going to have to pay for that monopolistic model and I suspect it’s not going to be the founding shareholders, it’s going to be somebody else,” he said in an interview Thursday.

Bertrand said Maple can only estimate the value of CDS Inc. based on its public statements, and Alpha, which is even harder even though it is owned by the banks because Maple is barred from any insider knowledge of its books.

The Maple bid depends on a review by the Competition Bureau, which must rule whether the group can go ahead with plans to integrate the Toronto Stock Exchange and Alpha, something that would give the group control of about 80 per cent of stock trading volume in Canada.

The group has been advised by its lawyers that the amalgamation should pass the bureau’s review because it would have to consider competition from U.S. stock exchange giants, where trading volumes “far exceed” those on Alpha, Bertrand said.

There is an equal risk that the LSE proposal will be rejected in its own regulatory review because it violates a Canadian rule that no shareholder in the exchange operator can exceed 10 per cent ownership, he added.

“That is a huge regulatory shift and one that should be carefully considered because once its done the die is cast and its very hard to change things.”

In addition, the deal is subject to approval from various Canadian regulators, including a review from Industry Canada under the Investment Canada Act, which must determine if the merger is “of net benefit” to Canada.