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Canadian Banks Show Rare Division Over TMX Sale to LSE

Canadian Banks Show Rare Division Over TMX Group Sale to LSE
Security personnel sit at the entrance to the broadcast center at the Toronto Stock Exchange in Toronto. Photographer: Norm Betts/Bloomberg

Canadian banks, united on most policy issues, are divided on whether to support the proposed sale of the country’s main stock exchange to London Stock Exchange Group Plc.

Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and National Bank of Canada, three of the country’s six biggest lenders, said yesterday they oppose the C$3.2 billion ($3.3 billion) transaction, concerned about job losses and surrendering regulatory control of the securities industry.

Royal Bank of Canada and Bank of Montreal support the combination, saying it will benefit Canada’s financial-services industry. Both banks are advising on the sale. Bank of Nova Scotia, the country’s third-largest bank, hasn’t weighed in on the debate.

“They’re not all the same - they don’t all wear white shirts and red ties,” said Ian Nakamoto, director of research at Toronto-based MacDougall MacDougall & MacTier Inc. “Each bank has a different culture and they’re run by different people.”

The six lenders, which represent the bulk of Canada’s deposits, loans and mortgages, have been united in the past on issues including financial reform, opposing a global bank tax and pushing for the right to sell insurance online.

The banks opposing the transaction released a letter yesterday outlining their concerns, saying Canada’s clout as a center for mining and energy trading may be diminished.

‘Flag of Globalization’

“The outlook for Canadian capital markets over the next number of years would be very uncertain,” according to the letter, signed by Toronto-Dominion’s TD Securities Chief Executive Officer Robert Dorrance, Richard Nesbitt, CEO of CIBC World Markets, and Ricardo Pascoe, co-CEO of National Bank Financial, Casgrain & Co. President Guy Casgrain and AltaCorp Capital Inc. CEO George Gosbee. Toronto-Dominion coordinated the logistics of the efforts.

Canada is not “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 told an Ontario legislative committee in Toronto yesterday that financial firms are also worried about access to capital and governance of the combined company.

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

‘Right for Canada’

National Bank of Canada 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 derivatives market. “What we’re hoping to impress upon policymakers is, let’s continue in that same culture and vein of thinking.”

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 24 pence, or 2.8 percent, to 845 pence in London trading. TMX Group fell 68 cents, or 1.7 percent, to C$38.39 at 4 p.m. trading in Toronto.

The Ontario Securities Commission will focus on “regulatory aspects” in its review of the proposed sale, said commission Chairman Howard Wetston.

Global Arena

“While exchanges operate in a global arena and consolidation is ongoing, it remains the responsibility of the local regulators to ensure regulatory oversight continues to be strong and effective,” Wetston told the Ontario committee today.

Shares of the Toronto Stock Exchange owner are trading about 3 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 gap between the shares and the offer price indicates investors are betting the sale may not be approved.

TMX Group CEO Thomas Kloet, responding to yesterday’s letter, said in a statement today that the transaction “contains protections and covenants to ensure that regulatory oversight of the exchanges and of Canadian issuers remain intact.”

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

Business Rationale

“The business rationale behind the merger makes a lot of sense in a world where exchanges are globalizing,” Royal Bank CEO Gordon Nixon told reporters on March 3. Having Toronto as a co-head office for a global exchange is “likely more attractive than the alternative” if TMX would remain a standalone Canadian exchange, he said.

The transaction would benefit Ontario and Toronto’s financial-services sector, which employs about 300,000 people, said Eric Tripp, President of Bank of Montreal’s BMO Capital Markets unit.

“These are good, well paying jobs,” Tripp said, according to the text of his speaking notes yesterday to the committee. “There are thousands more - lawyers, accountants, IT professionals - whose jobs exist solely to support this financial services cluster.”

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