TMX-Maple Deal Seen Unraveling as Biggest Exchange Gains Vanish: Real M&A

TMX Group Inc. (X), which has gained the most of any exchange involved in the industry’s biggest wave of acquisitions, is now in danger of being left without a buyer.

Since reaching a three-year high in June as the London Stock Exchange Group Plc (LSE) and a group of Canadian banks waged a bidding contest, the owner of the Toronto bourse has fallen more than 11 percent with the LSE scrapping its agreement. TMX is now trading more than C$10 below the C$50-a-share unsolicited bid from Maple Group Acquisition Corp., the widest gap since it was announced in May and indicating traders are growing increasingly concerned the takeover will also fail.

While more than $30 billion in acquisitions for exchanges have been announced in the past year, only one deal -- Deutsche Boerse AG (DB1)’s takeover of NYSE Euronext (NYX) -- has been approved by shareholders. Macquarie Group Ltd. says Maple’s attempt to buy TMX may not overcome antitrust scrutiny because it would combine Canada’s largest bourse with its biggest rival, Alpha Group, and create an entity controlling 85 percent of the nation’s trading. That may make TMX, one of the least valuable market venues versus earnings, fall further, said WallachBeth Capital LLC.

“The market doesn’t seem to be pricing in a very high likelihood of a deal being consummated,” Edward Ditmire, an analyst with Macquarie in New York, said in a telephone interview. “Certainly there are competitive implications. The market is mostly saying there’s an antitrust problem.”

Bidding Contest

Carolyn Quick, a spokeswoman at Toronto-based TMX, declined to comment on whether the deal will fall apart.

“We have nothing new to report on the discussions with TMX management,” Jennifer Lee, a spokeswoman for Maple, said in a telephone interview. “Maple Group is continuing to work on its regulatory approval process.”

TMX’s shares slipped 1 percent to C$39.94 today in Toronto.

LSE scrapped its bid for TMX on June 29 after failing to get enough shareholder support for the $3.1 billion deal, leaving Maple as the sole suitor for the Toronto exchange. TMX five days earlier had called LSE’s offer “superior.”

The London-based bourse, which announced its all-stock offer in February, raised its bid on June 22 by agreeing to pay TMX owners a special cash dividend of C$4 a share. Within hours, it was topped by a C$50 counteroffer from the group of Canadian banks and pension funds vying to keep TMX in local hands, a two dollar boost from its original proposal.

Maple, made up of firms from Toronto-Dominion Bank (TD) to Manulife Financial Corp., said the increased offer amounted to C$3.8 billion ($3.9 billion). TMX’s board on July 21 authorized management and advisers to hold discussions with Maple.

Exchange Consolidation

The collapse of LSE’s bid marked the third time in two months one of the world’s biggest exchanges failed to close a deal as they look to mergers to help cut costs and generate more revenue from trading in stocks, options and futures.

Nasdaq OMX Group Inc. (NDAQ) of New York and Atlanta-based IntercontinentalExchange Inc. (ICE) dropped their hostile offer for NYSE Euronext in New York on May 16 after regulators signaled they would block it. Singapore Exchange Ltd. (SGX)’s A$8.35 billion ($8.3 billion) bid to buy Sydney-based ASX Ltd. (ASX) was scuttled by Australia’s government in April.

While TMX gained 43 percent in the past year through last week, the most of any exchange involved in a billion-dollar takeover, the shares have dropped since LSE pulled its offer in June. TMX’s stock has now slid C$10.06 below the deal offer, the widest gap since the Maple bid was announced, data compiled by Bloomberg show. In the past two weeks, the difference has widened by more than C$4.

Antitrust Concern

Investors are concerned Canadian regulators will object to giving 13 Canadian financial firms control over the nation’s largest venues for equity trading, according to WallachBeth Capital’s Yemi Oshodi.

“I’m just really beginning to doubt that this thing is going to get regulatory clearance,” Oshodi, a managing director of M&A and special situations trading at New York-based WallachBeth Capital, said in a telephone interview.

Maple plans to buy Alpha Group, an alternative trading platform that competes with TMX, and Canadian securities clearing house CDS Inc., to integrate into TMX if its takeover succeeds. The plan requires approvals from provincial regulators, including those in Quebec and Ontario, as well as Canada’s Competition Bureau.

TMX had 65 percent of the Canadian market for stock trading in July, measured by number of shares traded, according to monthly statistics from the Investment Industry Regulatory Organization of Canada. Alpha Group, whose owners include Canada’s six largest banks, had a 19.7 percent share.

Deal Rationale

With TMX losing its gains since its agreement with LSE was announced, betting Maple’s bid, backed by some of Canada’s biggest financial institutions, will succeed may outweigh the risks of failure, according to First New York Securities LLC’s Andrew Ross.

Merger arbitragers can now make a 25 percent profit, based on the C$50-a-share cash portion of the offer, according to data compiled by Bloomberg.

“It’s a reasonable bet,” Ross, a partner and global equity trader at First New York, a New York-based proprietary trading firm that bets on stocks, commodities and derivatives, said in a telephone interview. “They’re large banks in most cases. Financing will be available to them.”

Still, Maple would be buying an exchange whose earnings are 26 percent less valuable than the industry median, according to data compiled by Bloomberg. Maple also has less incentive to clear the regulatory hurdles needed to acquire TMX and keep it in local hands without the threat of a takeover by a foreign buyer, according to Aite Group LLC’s Sang Lee.

“When LSE walked away, the first thing that popped into my head was, ‘What is the point of Maple now?’” Lee, managing partner at Boston-based research firm Aite, said in telephone interview. “Having got rid of the potential competitor, what’s the upside of going through with the deal?”

To contact the reporters on this story: Danielle Kucera in New York at dkucera6@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Nick Baker at nbaker7@bloomberg.net.

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