Canadian Banks Lead Growing Opposition to TMX-LSE Merger

Opposition from some of Canada’s biggest financial firms shows that concerns are mounting to the proposed sale of the Toronto Stock Exchange to the London Stock Exchange Group Plc, a banking lobby group said.

“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 Globe and Mail reported today that four Canadian banks including Toronto-Dominion Bank and Bank of Nova Scotia plan to release a letter as early as this week outlining their concerns with the C$3.2 billion ($3.2 billion) sale of TMX Group Inc.

“Toronto’s hopes to be a global financial services hub could suffer a severe and potentially irreversible setback,” the draft letter said, according to the Globe report. “Proponents of the proposed LSE takeover of the TMX believe this transaction represents Canada’s only choice to create a globally sustainable exchange. They are wrong. The TMX is already a viable global entity.”

Toronto-Dominion spokesman Wojtek Dabrowski declined to comment on the report. Scotiabank spokesman Joe Konecny said “there are lots of discussions going around right now.”

‘Serious Obstacle’

“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 today in a note.

London Stock Exchange fell 11.5 pence, or 1.3 percent, to 869 pence in London trading today. TMX Group fell C$1.26, or 3.2 percent, to C$38.62 at 2:07 p.m. trading in Toronto.

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.

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.

Alpha Competitor

“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.

Canadian Imperial Bank of Commerce Vice Chairman Jim Prentice said yesterday in a speech that TMX Group Inc., owner of the Toronto Stock Exchange, is “far more than a strategic asset” to Canada.

The transaction requires approval from the federal government and five Canadian provincial regulators including Ontario and Quebec, as well as the U.S. Securities and Exchange Commission.

Canadian Industry Minister Tony Clement told reporters today in Ottawa that the 45-day review period for the takeover hasn’t yet started.

Committee Hearings

An Ontario parliamentary committee is continuing hearings into the transaction today, with Ecker one of the scheduled speakers. Ontario Finance Minister Dwight Duncan has also expressed concern about the sale, calling the Toronto bourse a “strategic asset.”

The other banks signing the letter include CIBC and National Bank of Canada, the Globe said.

Royal Bank of Canada and Bank of Montreal didn’t sign it. Royal Bank, the country’s biggest lender, is advising the London exchange, while Bank of Montreal, the No. 4 bank, is working with TMX.

“It’s difficult to comment on a letter that we have not seen,” TMX spokeswoman Carolyn Quick said. “However we do note CIBC’s comments from yesterday and we believe that our merger agreement more than addresses their concerns. In fact, we think that our proposed merger will deliver significant opportunities for growth for the Canadian capital markets.”

Members of the Canadian Council of Chief Executives haven’t reached any consensus on whether the transaction should happen, group President and CEO John Manley said today at the hearings.

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

More Competition

Caldwell said he’s not surprised that the other banks aren’t supporting the transaction, given their investment in Alpha.

“What TSX will now offer is a global listings platform that Alpha can’t match,” Caldwell said. “It means there’ll be real competition in the exchange area and, worse still, there may be real competition for listings.

“Is that necessarily bad for Canada? No, not at all,” Caldwell said. “If Canadian companies can find themselves internationally listed, and get global exposure and global capital to a greater degree than they do now, it’s not a bad thing.”

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