Toronto Exchange Counter Offer Revives Growth Concern That Spurred LSE Bid

A group of Canada’s biggest banks and pension funds made an unsolicited C$3.6 billion ($3.7 billion) bid for TMX Group Inc. (X) to keep the country’s main stock exchange in Canadian hands while sacrificing global growth from a planned merger with the London Stock Exchange.

Maple Group Acquisition Corp., which comprises four Canadian banks and five pension funds, offered to buy the Toronto Stock Exchange owner for C$48 a share in cash and stock, topping a friendly stock bid from London Stock Exchange Group Plc. (LSE), according to a statement yesterday. Maple’s offer is 15 percent higher than TMX’s stock price, and 23 percent more than the LSE bid, based on May 13 prices.

“We’re going back to the old days, and I think that will not be as positive an outcome for the Canadian economy as the London one,” said Thomas Caldwell, chief executive officer of Caldwell Securities Ltd., which owns shares in global bourses. “I don’t think it’s going to be as productive for the country as being part of a significant international alliance.”

The counteroffer may end TMX’s efforts to join in the biggest round of global consolidation of exchanges, and leave LSE without a partner as it seeks to expand internationally and compete with larger rivals. LSE’s bid for TMX was part of more than $30 billion in takeover offers for exchanges in less than six months.

Photographer: Norm Betts/Bloomberg

A technician works in the broadcast center of the Toronto Stock Exchange in Toronto. Close

A technician works in the broadcast center of the Toronto Stock Exchange in Toronto.

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Photographer: Norm Betts/Bloomberg

A technician works in the broadcast center of the Toronto Stock Exchange in Toronto.

“Something would be lost in this country in terms of potential,” Caldwell said in an interview.

Shares Soar

TMX rose C$2.30, or 5.5 percent, to C$44.05 at 4 p.m. trading on the Toronto Stock Exchange, the biggest gain in three months. LSE jumped 56.5 pence, or 6.8 percent, to 884 pence in London after NASDAQ OMX Group Inc. and IntercontinentalExchange said they are withdrawing their joint proposal to buy NYSE Euronext. The LSE bid for TMX is worth about C$41.80 a share today.

Canada’s banks, concerned about the loss of regulatory oversight in the proposed TMX sale to the LSE, would gain an ownership stake in the country’s main stock market after a nine- year absence. Canada’s bank-owned brokerages were among the owners of the Toronto Stock Exchange before it was demutualized and taken public in 2002.

“The only possible snags could be whether the Maple proposal could be completed without undue delay as there may be anti-competition concerns surrounding the deal,” Stephen Boland, an analyst at GMP Securities, said today in a note. “Also, whether the growth prospects are sufficiently explained to outweigh the higher offered price.”

Source: Caldwell Securities via Bloomberg

Caldwell Securities Ltd. Chief Executive Officer Thomas Caldwell. Close

Caldwell Securities Ltd. Chief Executive Officer Thomas Caldwell.

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Source: Caldwell Securities via Bloomberg

Caldwell Securities Ltd. Chief Executive Officer Thomas Caldwell.

Maple Investors

Maple’s proposal gives TMX shareholders 40 percent of the company, the pension funds 35 percent and the bank-owned brokerages 25 percent, the statement said.

“This is about capitalizing on the TMX’s strength to build a better exchange,” Luc Bertrand, Maple spokesman and vice chairman of National Bank of Canada (NA) said today in a conference call. “We also believe we’ve made a superior proposal to the TMX Group and its shareholders.”

Maple’s investors are Toronto-Dominion Bank (TD), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce, National Bank, Caisse de Depot et Placement du Quebec, Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan, Alberta Investment Management Corp., and Fonds de Solidarite des Travailleurs du Quebec.

The group doesn’t include Royal Bank of Canada, the country’s largest lender, and Bank of Montreal, the No. 4 bank, whose investment banks are advisers to the TMX-LSE transaction.

Bertrand said the Maple Group would welcome other brokers and investment dealers to participate in the transaction.

Integrate Alpha

The Maple group said it plans to integrate Alpha Group, a bank-owned trading system that competes with TMX, and CDS Inc., Canada’s clearinghouse for equities, after completing its takeover of TMX.

“It’s the right move for the country and doubles as a smart business deal as well,” said Mark McQueen, president and CEO of Toronto-based Wellington Financial LP, which manages about C$450 million in assets. “Whatever concerns the government might have about Alpha being involved, our capital markets are still better off under this scenario than they are under the LSE proposal.”

Under the Maple plan, TMX shareholders would get C$33.52 in cash plus 0.3016 of a Maple share for each TMX share. The group, which was created for this bid, would pay as much as C$2.5 billion in cash under the offer.

The Maple offer values TMX at 14.6 times analysts’ average earnings estimate for 2011, data compiled by Bloomberg show. That’s 5.2 percent below the stock’s average price-earnings ratio over the last five years, according to Bloomberg data.

Preserve Governance

Maple said it intends to preserve TMX’s current corporate governance, maintain management and staffing levels while investing in the growth of derivatives trading and clearing. Half of the board would be independent, with 25 percent of directors from Quebec.

If the Maple offer succeeded, Canadian banks would gain revenue from their share of TMX’s trading and listing fees. They would also get reduced costs for trading by integrating Alpha and CDS.

“I see the banks trying to protect what they have through this deal,” Alison Crosthwait, director of global trading research at Instinet LLC, which competes with TMX. “I think that they’re looking to take control over capital markets in a way that they don’t have right now.”

The Toronto Stock Exchange owner, which once handled all trading of Canadian equities, has lost stock trading business to firms such as Alpha and other alternative trading platforms. Alpha, founded in 2007, executes about 22 percent of the nation’s stock volume. TMX had a 66 percent market share at the end of the first quarter.

‘Significant Value’

“We believe there is an opportunity to create significant value by capitalizing on TMX’s strengths to build a stronger integrated exchange and clearing group, and by doing so, to secure the future growth and ongoing integrity of the Canadian capital markets,” Bertrand said earlier in a statement.

Bertrand, 56, was CEO of the Montreal Exchange when it was bought by the Toronto Stock Exchange owner, and was TMX’s deputy CEO until he stepped down in June 2009. The Montreal bourse handles derivatives trading in Canada.

The all-Canadian bid wouldn’t require approval under the federal government’s Investment Canada Act, since it isn’t a foreign takeover, eliminating a potential roadblock faced by LSE in its bid. The Maple deal requires support from two-thirds of TMX shareholders and regulatory approvals.

Proposal Differs

Maple’s proposal differs from the failed Nasdaq offer for NYSE Euronext (NYX), Bertrand said on the call. Nasdaq faced antitrust issues related to its U.S. listings business, while the Maple bid for TMX is different because Alpha, which would later merger with the Toronto exchange, doesn’t offer listings, he said.

“We would caution investors that there is a fair amount of regulatory/political uncertainty around both acquisition proposals at this point, making likely outcomes tough to call,” Ed Ditmire, an analyst at Macquarie Group Ltd. in New York, said today in a note.

Ontario Finance Minister Dwight Duncan, who has been critical of the LSE bid because it would mean the loss of a “strategic asset” to a foreign company, said he “welcomed” the alternative offer for TMX.

“I look forward to Canadians having a chance to look at an alternative bid that includes Canadians,” Duncan said in a May 14 interview.

Addresses Concerns

The proposal from banks and pension funds “responds to a number of the concerns that I’ve raised about Canadian control,” Duncan said “It just shows that the Canadian financial-services sector can play on the world stage and can continue to take a leadership role.”

LSE said it remains committed to its bid for TMX, which would be the largest foreign takeover of a Canadian financial services firm. Carolyn Quick, a TMX spokeswoman, declined to comment.

TMX and LSE said in February that they were targeting 35 million pounds or C$56 million in additional revenue in the third year after the merger closed, rising to 100 million pounds or C$160 million in the fifth year. The gains would come from cross-listings and admissions, cross-selling and distributing products and services and new products.

Profit Growth

Instinet’s Crosthwait said she doesn’t understand the investment case behind the bid from the Canadian banks and pension funds.

“I don’t see where the growth is going to come from,” Toronto-based Crosthwait said. “They would really just be owning a profitable company, which for the banks may make sense, but for the pension funds, they do need to show investment returns. I don’t know if they can compete with what the LSE is offering in that regard.”

TMX Group is expected to post profit growth of 23 percent this year and 6 percent in 2012, according to analyst estimates compiled by Bloomberg. That compares with forecast earnings growth of 33 percent and 16 percent for the S&P/TSX Composite Index, data compiled by Bloomberg show.

TMX shareholders will probably take the higher offer even with LSE’s enticement of having TMX take part in a more international opportunity, according to Caldwell.

“I think it’s a sad day for Canadian capital markets, despite the fact that investors even like ourselves will probably take the money,” Caldwell said. “It’s unfortunate, as far as I’m concerned. We won’t know what we missed.”

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net; Sean B. Pasternak in Toronto at +1- spasternak@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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