Toronto-Dominion, National Bank Apprehensive on TMX Sale

Toronto-Dominion Bank (TD) and other Canadian lenders are apprehensive about the proposed sale of TMX Group Inc. (X) to London Stock Exchange Group Plc (LSE) because the country will cede regulatory control of its main stock exchange.

“Several financial institutions including TD have expressed apprehension about the proposed merger,” Robert Dorrance, head of Toronto-Dominion’s investment bank, told a parliamentary committee in Toronto today. “We do not believe this takeover offers the right solution to creating a globally sustainable exchange.”

Canadian banks are beginning to voice their opposition to the proposed C$3.2 billion ($3.2 billion) transaction, concerned that control of the exchange and the regulation of capital markets will shift to London. Canadian Imperial Bank of Commerce Vice Chairman Jim Prentice said yesterday the exchange is “more than a strategic asset.”

Banks including Toronto-Dominion and National Bank of Canada released a letter today outlining their concerns with the transaction, which they say may cost Canada jobs, a loss of regulatory control and hinder the exchange’s role as a hub for mining and energy trading.

“The outlook for Canadian capital markets over the next number of years would be very uncertain,” according to the letter, signed by five investment bankers, including Dorrance, Richard Nesbitt, CEO of CIBC World Markets, and Ricardo Pascoe, co-CEO of National Bank Financial.

‘Right for Canada’

“This does not mean we are obliged to support any deal that wraps itself in the flag of globalization,” the bankers wrote in the letter titled ‘Let’s Build on a Canadian Success Story’. “Canadians are quite capable of competing and winning on the global stage. Our success does not depend on selling out or waiting for others to ‘save’ us.”

Dorrance said during the hearing that financial firms are also worried about access to capital and governance of the combined company.

“Rule making will lose its Canadian focus,” Dorrance said.

National Bank of Canada (NA) Vice Chairman Luc Bertrand, who appeared alongside Dorrance, later told reporters that the issue is what’s right for Canada.

“Canada has made some really smart decisions over the years, and we’re the envy of the world,” said Bertrand, the former head of the Montreal Exchange. “What we’re hoping to impress upon policymakers is, let’s continue in that same culture and vein of thinking.”

Stocks Fall

TMX and LSE dropped on concern the deal may be blocked. The takeover requires approval from the federal government and five Canadian provincial regulators including Ontario and Quebec. London Stock Exchange fell 11.5 pence, or 1.3 percent, to 869 pence in London trading today. TMX Group fell 81 cents, or 2 percent, to C$39.07 at 4 p.m. trading in Toronto.

“We see this as the most serious obstacle to date for the LSE/TMX merger, and it comes at a time when politicians in Canada are treating the merits of the deal for Canada with a measure of skepticism,” Macquarie Capital Markets analyst Ed Ditmire said in a note.

Shares of the Toronto Stock Exchange owner are trading about 5 percent below the offer from the LSE, according to Bloomberg data. When the deal was announced Feb. 9, TMX shareholders were offered a premium of more than 8 percent. The discount to the offer price indicates investors are betting the sale may not be approved.

Considerable Discussion

“There’s no question this is a proposal that has provoked considerable discussion and debate from the financial services community,” Janet Ecker, president of the Toronto Financial Services Alliance, said today in a telephone interview. “It’s been clear for some time that there’s not unanimity within the community about the value of the deal.”

The Canadian banks own Alpha Group, which operates an alternative trading platform that competes with TMX. Alpha has taken about 19 percent of the share of equity trading in Canada since it launched in November 2008.

“Of course they’re against it because it provides real competition for Alpha,” said Brendan Caldwell, Chief Executive Officer of Caldwell Investment Management Ltd., a money manager that owns shares in TMX. “They banks don’t like real competition, they like the little oligopoly where they divvy up the financial pie of Canada amongst themselves. It’s quite incestuous.”

Toronto-Dominion CEO Edmund Clark has proposed that Alpha combine with TMX Group, the Financial Times reported today on its website. Dorrance said he wasn’t aware of a potential merger.

‘Get With the Program’

Barbara Stymiest, a former CEO of the Toronto Stock Exchange who is retiring as an executive from Royal Bank of Canada (RY) in June, told the committee she’s in favor of the transaction, calling it an “opportunity not to be squandered.”

“Let’s get with the program; let’s believe in ourselves,” Stymiest said.

Royal Bank, the country’s biggest lender, is advising the London exchange on the transaction, while Bank of Montreal (BMO), the No. 4 bank, is working with TMX.

To contact the reporter on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net.

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; David Scheer at dscheer@bloomberg.net.

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