London Stock Exchange Group Plc, the 210-year-old bourse operator, agreed to buy Toronto Stock Exchange owner TMX Group Inc. for about C$3.2 billion ($3.2 billion) in stock as the companies cut costs to counter lost market share. LSE surged to a two-year high.
LSE shareholders will own 55 percent of the company, while TMX investors will hold the rest, the exchanges said today in a statement. TMX shareholders will receive 2.9963 LSE shares for each they own, valuing the Toronto-based company at about C$42.68 a share, 6 percent more than yesterday’s closing price.
Xavier Rolet, LSE’s chief executive officer, will reduce 35 million pounds ($56 million) a year in costs and expand into new businesses such as derivatives as competition from alternative trading platforms increases as do mergers among rivals. His predecessor Clara Furse fought off five takeover offers in two years and bought the operator of the Milan stock exchange. The LSE’s share of U.K. equity trading was 63.8 percent last quarter, compared with 75 percent in 2009, data from the London- based company show.
“This deal comes against the backdrop of consolidation in world exchanges and represents the first strategic move by Xavier Rolet,” Phil Dobbin, an analyst at Shore Capital Stockbrokers, wrote in a note to investors today. “The key benefit is the creation of a global exchange with a strong presence in natural resources and emerging markets.” He has a “buy” recommendation on LSE.
Today’s agreement comes four months after Singapore Exchange Ltd. offered to buy ASX Ltd., operator of Australia’s main bourse, for A$8.4 billion ($8.5 billion) in a cash and shares deal that would create the world’s fifth-largest listed exchange company. Thomas Kloet, chief executive of TMX, was CEO of Singapore Exchange until December 2002.
LSE surged as much as 11 percent to 989 pence and traded up 9.5 percent at 977 pence at 10:35 a.m. today in London as some investors speculated that the agreement may spur competitors to make rival bids.
“The market may potentially see this merger announcement as both LSE and the Toronto Stock Exchange putting themselves in play,” Nese Guner and Haley Tam, analysts at Citigroup Inc. in London, wrote in a note to investors today.
The bid may face opposition as the Canadian government reviews its foreign ownership rules after blocking a hostile takeover of Potash Corp. of Saskatchewan Inc. Canadian law allows the government to reject foreign takeovers that don’t provide a “net benefit” to the country. The Ontario and Quebec securities regulators would also have to approve any sale of more than 10 percent of the voting shares of TMX.
A sale to the London exchange would be the largest foreign takeover of a financial services company in Canada. The federal government is reviewing the limits, which apply to industries including airlines, telecommunications firms and media.
Industry Minister Tony Clement and Finance Minister Jim Flaherty declined to comment on the stock exchange merger talks yesterday in Ottawa.
The deal is forecast to close in autumn this year, Rolet said today on a conference call with reporters.
The exchanges are targeting 35 million pounds or C$56 million in additional revenue in the third year, rising to 100 million pounds or C$160 million annual revenue in the fifth year. This will come from cross-listings and admissions, cross- selling and distributing products and services and new products, according to today’s statement.
In costs, the target is for annual savings of 35 million pounds or C$56 million by the end of the second year. The deal is expected to add to earnings per share in the first full year after completion.
“We believe that this level of cost synergies is achievable even with a board of 15,” James Hamilton, an analyst at Numis Securities in London, wrote in a note to investors. With the revenue forecast “should these synergies be achieved they would equate to a huge 56 percent of the underlying profit reported by the LSE last year. A clear strong ‘Buy’ if you believe the 100 million pounds of revenue synergies can be achieved.”
Rolet will be CEO of the enlarged company, which will be renamed, according to today's statement. TMX CEO Kloet will become president, and Michael Ptasznik, chief financial officer of TMX, will be CFO. Raffaele Jerusalmi, CEO of LSE’s Borsa Italiana, will be a director. The stock will trade in London and Toronto.
Expand in Derivatives
European equity markets are undergoing an overhaul aimed at spurring competition among exchanges and broker-operated venues and limiting costs for investors. Mifid, or the Markets in Financial Instruments Directive, is being updated by the European Union after it was adopted in 2007. Canadian regulators are also assessing trading rules.
The LSE already licenses TMX’s Sola trading technology for its EDX London derivatives venue under a partnership formed in March 2009, replacing a platform provided by Nasdaq OMX. Toronto-based TMX operates the Montreal exchange, which developed Sola.
LSE, with average profit growth of 21 percent since 1999, is swapping stock priced at 6.6 times earnings before interest, taxes, depreciation and amortization for TMX shares that trade at an Ebitda multiple of 9, according to data compiled by Bloomberg. TMX’s annual income has risen 3.5 percent annually since 2000.
About 16 cents of every dollar LSE takes in as revenue is recorded as net income, according to the average since 2002 compiled by Bloomberg. At TMX, net margins have averaged 32 percent, the data show.
The agreement, following a decade-long wave of mergers among exchange companies, unites two of the biggest venues for commodity producers. While energy and raw-materials suppliers make up 22 percent of the value of equities worldwide, they account for 36 percent of companies listed in the U.K. and 50 percent in Canada, data compiled by Bloomberg show.
“We actually recommended it to both companies months ago,” Thomas Caldwell, chief executive officer of Caldwell Securities Ltd. in Toronto, which, with its affiliates, oversees about C$1 billion ($1 billion), including LSE and TMX shares. “It seems so logical to me because you’re creating the largest resources exchange in the world and really allowing London to get into the derivatives business. It’s a worldwide business and they’re very similar. That would be a great merger.”
Asked about consolidation the day he was named to the post in 2009 Rolet said “all avenues are open, all avenues are considered. We wouldn’t be doing our jobs otherwise.”