Not even the prospect of reaping a 198 percent annualized return in one month can dissuade traders from betting that the $3.73 billion takeover of TMX Group Inc. (X) is more likely to unravel than any other deal in North America.
TMX, owner of the Toronto Stock Exchange, is trading 15 percent below a C$50-a-share offer from 13 Canadian banks and pension funds known as Maple Group Acquisition Corp. The gap is the widest of any billion-dollar deal in the U.S. or Canada, indicating traders aren’t convinced Maple can get the approvals it needs even after the group extended its Feb. 29 deadline by a month, according to data compiled by Bloomberg.
While Canada’s largest pension fund said last week that it is optimistic the Maple bid will be approved, the nation’s competition watchdog has raised “serious concerns” about combining the country’s largest exchange with its biggest rival to create an entity that controls 87 percent of trading and clears every transaction. If the TMX deal fails, it would join more than $30 billion in announced takeovers, including Deutsche Boerse AG (DB1)’s agreement for NYSE Euronext (NYX), which have already been terminated or blocked by regulators in the past year.
“We go back to the issues from day one,” said Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth Capital LLC, said in a telephone interview. For the deal to be approved, “you would need a substantial package of divestitures to create some other competitor. I just can’t see them offering enough concessions to the regulators to assuage their concerns,” he said.
An extension would be “just a glimmer of hope, because what’s another month going to do?” said Oshodi, who estimates the odds that Maple can close the deal at about 15 percent.
“Maple and TMX Group are committed to the transaction and are working diligently to obtain the required regulatory approvals,” it said. “They are in ongoing discussions with the regulators and have made numerous submissions to them.”
“However, there can be no assurance that remedies short of a material detriment will address the issues and concerns raised by the securities regulatory authorities,” the statement said.
Carolyn Quick, a spokeswoman for Toronto-based TMX, declined to comment on when the transaction would be completed.
Maple, made up of firms including Toronto-Dominion Bank (TD), Manulife Financial Corp. (MFC) and the Ontario Teachers’ Pension Plan, began its C$3.73 billion ($3.73 billion) bid nine months ago, when it challenged an agreement that TMX and London Stock Exchange Group Plc announced in February 2011.
The group, which sought to keep the Toronto exchange owner in local hands, was left as the only bidder after London-based LSE failed to get support from TMX owners and dropped its stock offer on June 29.
Maple intends to acquire 70 percent to 80 percent of TMX in cash and the rest with Maple stock. It also plans to buy Alpha Group, an alternative trading platform that competes with TMX, and the Canadian Depository for Securities Ltd., which protects buyers and sellers from losses if one party is unable to pay as the nation’s securities clearinghouse, to integrate into TMX.
While Michael Sabia, chief executive officer of Montreal- based Caisse de Depot et Placement du Quebec, said he’s “quite optimistic” that its group’s takeover of TMX will be approved by regulators, merger arbitragers remain more skeptical of its completion than any other acquisition in North America.
With TMX ending at C$42.60 a share last week, the difference between its price and the cash portion of Maple’s deal offer is now C$7.40, data compiled by Bloomberg show. On a percentage basis, shares of TMX trade at the biggest discount to its takeover bid among all pending deals in the U.S. or Canada worth $1 billion or more, the data show.
Maple has now pushed back its offer deadline five times since proposing to buy the Toronto exchange owner in May. If the deal isn’t cleared by regulators, the group is required to pay TMX C$39 million. The transaction still needs approval from Canada’s Competition Bureau and provincial regulators including those in Quebec and Ontario.
Alexa Keatinge, a spokeswoman for the Competition Bureau, said in an e-mailed statement last week in response to comments from Caisse de Depot’s CEO that “there are no new developments to report regarding the Bureau’s ongoing review of Maple’s proposed acquisitions at this time.”
Keatinge declined to make any further comment on when it will reach a decision on Maple’s takeover proposal.
The Competition Bureau said on Nov. 29 that it had “serious concerns about the likely competitive effects of the proposed transactions in the current environment, primarily in connection with equities trading and clearing and settlement services in Canada.”
While Maple and TMX said at the time that they would work with the Competition Bureau and identify possible “remedial measures,” Maple’s Luc Bertrand said on Dec. 1 that removing the clearinghouse or the bank-owned trading platform from its takeover proposal would be a deal breaker.
If the Maple deal collapses, it will be the fifth time in less than a year that an exchange takeover failed after the biggest wave of industry consolidation led to almost $40 billion in announced acquisitions. In April, Australia’s government scuttled Singapore Exchange Ltd.’s bid for Sydney-based ASX Ltd.
Nasdaq OMX Group Inc. (NDAQ) of New York and IntercontinentalExchange Inc. in Atlanta dropped their hostile offer for NYSE Euronext in May after U.S. regulators signaled they would block it. A month later, LSE’s deal for TMX crumbled.
On Feb. 1, European Union regulators vetoed Frankfurt-based Deutsche Boerse’s takeover of NYSE Euronext of New York to create the world’s biggest exchange after concluding that the $9.5 billion acquisition would hurt competition and lead to a “near-monopoly” in the region’s exchange-traded derivatives.
The Maple bid “would be very unlikely to be approved in either in Europe or the United States,” Edward Ditmire, a New York-based analyst at Macquarie Group Ltd., said in a telephone interview. “It’s extremely speculative.”
Sachin Shah, a Jersey City, New Jersey-based merger arbitrage strategist at Tullett Prebon Plc, says investors are underestimating the possibility that regulators and Maple will agree to conditions that mitigate antitrust concerns and still allow the group to keep its trading and clearing businesses.
Maple said last week that it and TMX have proposed a pricing model for its clearing business, as well as remedies to address concerns on equities trading to regulators.
“A lot of the conditions will have this hands-off policy,” Shah said in a telephone interview. “The chances are very high that a deal gets approved.”
Traders who purchase TMX shares now stand to almost triple their profit on an annualized basis if the deal closes by the end of March, according to data compiled by Bloomberg. Without taking into account when the transaction would be completed, the arbitrage profit is 17 percent, the data show.
Will Harrington, a New York-based merger arbitrage analyst at Wall Street Access, says Maple is unlikely to win approval, especially after exchanges from New York to Frankfurt and Singapore were prevented from merging with other venues because of antitrust or national interest objections from regulators.
“It could go the way of the dodo,” he said in a telephone interview, referring to the flightless bird in Mauritius that was driven to extinction in the late 17th century. “It feels like all the exchange deals right now are dead in the water.”