Several of the biggest TMX Group Inc. shareholders say they plan to support London Stock Exchange Group Plc’s C$3.2 billion ($3.2 billion) takeover offer because of potential for cost savings and more comprehensive services.
Money managers at Bissett Investment Management, Mawer Investment Management Ltd., Louisbourg Investments Inc. and Brown Capital Management Inc., which combined own more than 6 percent of shares in the owner of the Toronto Stock Exchange, said their first impression is that shareholders should benefit from the combination, which would give TMX owners about 45 percent of the combined company.
“Initially, our thought is, it is positive for sure,” said Garey Aitken, chief investment officer of Bissett in Calgary, which manages about C$13 billion, including more than 3 million of TMX’s 74.4 million shares. “The LSE seems to be a logical partner for the TMX Group. If they were able to achieve the synergies as stated, that is a lot of value for both shareholder groups.”
TMX shares rose 6.4 percent yesterday to a 31-month high of C$42.85 after the companies agreed to exchange 2.9963 LSE shares for each TMX share. The agreement requires the approval of two- thirds of votes cast at a meeting of TMX owners, and of regulators in the U.K., Italy, Canada and four Canadian provinces.
In a press release, the parties said the combination may lead to C$160 million more in annual revenue after five years than the two companies could achieve separately, since the merged firm will offer more services in more places. Costs should drop by C$56 million a year after two years due in part to technology savings.
The projected revenue and cost benefits have Jim Hall, director of research at Mawer in Calgary, leaning toward support for the deal, he said in a phone interview.
“These companies will be able to increase the attractiveness of listing on their joint exchanges to companies, and I think there will be technology-cost savings they should be able to pass through to shareholders,” said Hall, whose company oversees 1.31 million TMX shares.
Finding a merger partner was important for TMX because of its declining market share, said Martin Steinik, a money manager at Brown Capital Management in Baltimore. The TSX’s share of Canadian trading dropped to 72 percent in December from 76 percent a year earlier, according to the Investment Industry Regulatory Organization of Canada. Alpha Trading Systems, an alternative platform owned in part by Canada’s six largest banks, had an 18 percent market share.
‘More Dominant Competitor’
“They had an issue with a direct competitor in Alpha,” said Steinik, whose company counts about $10 million in TMX shares among its more than $500 million in assets managed. “It’s a highly competitive space. You put TMX and LSE together, you have a much more dominant competitor.”
LSE’s offer gives an 8.1 percent premium over the average TMX share price in the 20-day period leading up to the deal announcement. Singapore Exchange Ltd.’s agreement to buy Australia’s ASX Ltd. in October included a 42 percent premium. When TMX bought Montreal Exchange Inc. in 2007, it paid a 22 percent premium.
Louisbourg money manager Mathieu Roy said that while he would prefer a higher price for his TMX shares, an acquirer offering more would demand a more-traditional takeover rather than a so-called merger of equals that will keep some of TMX’s Toronto-based executives.
A pure takeover would be less likely to pass muster with Canadian regulators, Roy said. The country blocked BHP Billiton Ltd.’s $40 billion hostile bid for Potash Corp. of Saskatchewan Inc. in November on national-interest grounds.
“That type of scenario would be difficult to accomplish,” said Roy, whose firm manages C$1.5 billion, including TMX shares, in Moncton, New Brunswick. “We saw what happened with Potash. I think something like this has a chance to work.”
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