London Stock Exchange Group Plc and the Canadian banks and pension funds battling for control of TMX Group Inc. need to sweeten their bids because the competing cash and stock offers are too similar, investors said.
“Right now, the issue is one of price,” Richard Fogler, who helps manage C$1.25 billion ($1.29 billion) at King West Financial in Toronto, including TMX shares, said yesterday in an interview. “Let one of them speak with their checkbook.”
TMX Group, owner of the Toronto Stock Exchange, backs an all-stock takeover by LSE worth C$46.03 a share. The Toronto-based firm rejected a cash-and-stock bid from Maple Group Acquisition Corp., whose 13 members include Toronto-Dominion Bank and Manulife Financial Corp. Maple Group offered C$48 a share in cash and stock in its C$3.58 billion bid.
TMX fell 1.2 percent to C$43.64 at 4 p.m. on the Toronto Stock Exchange, below the offer price of both proposals, indicating traders are concerned the bids face opposition from investors and regulators.
Shareholders of TMX and LSE vote on the friendly deal on June 30, with two-thirds of TMX votes cast needed to proceed. Maple Group’s bid is contingent on TMX shareholders voting against the TMX offer, worth about C$3.42 billion.
“There are two competing bids on the table; they both have a whole bunch of uncertainties,” said Fogler, who hasn’t decided how he will vote. “In the LSE bid, the uncertainties are regulatory, and in the Maple bid, the uncertainties are regulatory as well.”
The odds of Maple Group and London Stock Exchange winning over TMX shareholders are about even, underscoring the need for TMX and LSE to step it up with better marketing or a sweetened bid, said Thomas Caldwell, who invests in bourse stocks.
“It’s an even money bet at this stage of the game,” Caldwell, chief executive officer of Toronto-based Caldwell Securities Ltd., said in a telephone interview from Paris. “I think London-TMX could make a lot stronger case than they seem to have made to date.”
Maple Group first approached TMX on May 13 with a plan to buy the Canadian exchange owner. TMX rejected the offer on May 20, saying it wasn’t superior to its Feb. 9 agreement with LSE, prompting Maple Group to take its offer directly to TMX investors.
“The biggest pushback TMX-LSE is going to get is over the value gap,” Edward Ditmire, an analyst with Macquarie Group Ltd. in New York, said in an interview. “Ultimately they need to get out their financial cap and find ways to get their offer price higher.”
LSE CEO Xavier Rolet said Maple’s claim of a higher bid is a “smokescreen” because the equity portion of the offer is backed by Maple stock that can’t be valued.
When asked about the possibility of a higher bid, LSE executive David Lester said in a June 9 interview: “We’re selling the bid that we’ve got.”
Maple Group spokesman Peter Block said its bid is already superior to LSE’s offer and it isn’t “going to comment on hypotheticals” about raising its offer.
TMX and LSE could maximize their chances of winning over investors by finding cost savings, or using debt to award a special dividend to shareholders, Ditmire said.
“By borrowing to pay out a one-time cash dividend to both TMX and LSE shareholders, they could create a bid that’s more financially attractive,” Ditmire said.
40 Percent Stake
Maple Group’s plan would give shareholders 40 percent of the company, while the pension funds would own about 31 percent and bank-owned investment dealers would own about 22 percent. The four investors announced June 12 -- Desjardins Financial Group, Manulife, Dundee Capital Markets and GMP Capital Inc. -- would own a combined 7 percent.
Maple Group investors also include Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan, Alberta Investment Management Corp. and Fonds de Solidarite FTQ.
Maple Group also said it aims to acquire Alpha Group, a bank-owned operator of an alternative trading system that competes with the Toronto exchange, and Canadian securities clearing house CDS Inc. to integrate into TMX after completing the takeover. Maple Group CEO Luc Bertrand gave CDS a value of about C$170 million, and Alpha a value of C$140 million to C$170 million during yesterday’s investor call.
Caldwell wouldn’t say which bid he’s supporting.
“Our corporate style has typically been to support management,” Caldwell said. “My sense is that will continue to be our style, because we are looking at capital markets in a broader long-term context.”
Both bids require regulatory approvals to succeed. The LSE-TMX bid needs approval from Industry Minister Christian Paradis, whose reviewing the transaction to determine if the deal is a “net benefit” to the country under the Investment Canada Act, and approvals from provincial regulators including those in Ontario and Quebec.
The Maple bid wouldn’t require Industry Canada approval because it’s not a foreign transaction, though it will face reviews by regulators and Canada’s competition bureau, the group said in a June 13 presentation.
“Each of the two bids has a big regulatory hurdle that has to cross,” Macquarie’s Ditmire said “For shareholders, the frustrating thing is that they’re probably not sure if they have one, two or zero viable offers.”