Shares of the Toronto Stock Exchange owner are trading about 8 percent below the C$43.91 a share offer from the LSE, while the owner of the New York bourse’s shares are in line with the bid by Europe’s biggest exchange.
Investors are questioning the C$3.2 billion ($3.25 billion) takeover of TMX Group less than four months after the Canadian government rejected BHP Billiton Ltd.’s hostile bid for Potash Corp. of Saskatchewan Inc. Comments by Ontario politicians have also raised doubts about the proposed transaction.
“I think the chances of succeeding are a little bit better than 50-50,” said Thomas Caldwell, chief executive officer of Caldwell Securities Ltd., which oversees about C$1 billion including TMX and LSE shares. “It’s not about the business case, it’s about politics.”
Shareholders of TMX Group and NYSE Euronext were offered premiums of more than 8 percent in the takeovers announced this month. Since Deutsche Boerse announced a $9.53 billion all-stock purchase of NYSE on Feb. 15, the premium has disappeared. By contrast, the premium on the LSE bid was at 8.5 percent as of 4 p.m. New York time. TMX shares fell 12 cents to C$40.48 at the close of trading in Toronto.
The share-price gap suggests traders are betting the Canadian transaction is less likely to close. LSE’s TMX purchase has the 13th highest gap among 133 pending takeovers with North American companies as targets, according to Bloomberg data. The Deutsche Boerse deal ranked 105th.
LSE agreed Feb. 9 to buy TMX in an all-stock deal to expand into new businesses as competition from trading platforms and mergers among rivals increase. TMX investors will get 2.9963 LSE shares for each share they own. LSE shareholders will own 55 percent of the combined company, while TMX investors will own the rest. LSE closed at 920.5 pence today on the London Stock Exchange.
The transaction requires approvals from Canada’s federal government and provincial securities regulators in Ontario, Quebec, British Columbia, Alberta and Manitoba, as well as the U.S. Securities and Exchange Commission and two-thirds of TMX shareholders.
Scotia Capital analyst Phil Hardie pegged the odds of regulatory approval on the TMX deal at 50/50 due to “increased negative rhetoric” from Ontario Finance Minister Dwight Duncan, who called TMX Group a “strategic asset,” and heightened uncertainty related to public hearings planned in Ontario and Quebec.
Scotia Capital cut TMX’s one-year target price to C$45 a share because of the lower probability of regulatory approval, Hardie said in the Feb. 15 note.
“It’s not an easy political question,” Royal Bank of Canada Chief Executive Officer Gordon Nixon said in a Feb. 11 interview. “It’s very important for those who have to consider those issues to really understand the facts as opposed to the rhetoric.”
Ontario politicians need to ensure they understand the longer-term value of the deal to Toronto versus the longer-term implications of not doing a transaction, said Nixon, who oversees Canada’s biggest bank. Royal Bank’s RBC Capital Markets investment-banking unit advised LSE on the transaction.
Quebec Finance Minister Raymond Bachand said his province will hold public hearings into the transaction, while British Columbia Finance Minister Colin Hansen, who called the deal a “big opportunity” for Canada, said he has no such plans.
Canadian Industry Minister Tony Clement said Feb. 14 he will review the TMX deal under the Investment Canada Act to determine if the transaction is beneficial to the country’s economy.
“Ontario could be problematic, but I think it could be a challenge at the fed level as well, just in national interests,” Caldwell said in a Feb. 15 interview. “It might turn into a cause célèbre that the politicians really want.”
London Stock Exchange’s bid comes after Clement rejected BHP’s hostile takeover of Potash Corp. Until the Potash bid, Canada had accepted all but one takeover reviewed by the government over the past 25 years.
TMX’s eroding market share in equity trading from alternative marketplaces including the bank-owned Alpha Trading Systems also underscores the “logic” of the deal, according to Caldwell. Alpha, which started in November 2008, had about 19 percent of the share of Canada’s stock trading marketplace last year, compared with about 73 percent by TMX, according to the Investment Industry Regulatory Organization of Canada.
“It’s a deal that pretty well has to come because of the creation of Alpha and the bleed-off of volumes from Alpha and some of the alternative trading systems,” Caldwell said. “I don’t think they have a choice, they have to do something.”