A group of Canadian banks and pensions raised their offer for the owner of the Toronto Stock Exchange, intensifying a bidding war hours after London Stock Exchange Group Plc agreed to pay a special dividend should its takeover of TMX Group Inc. agreement succeed.
Maple Group Acquisition Corp., made up of 13 firms such as Toronto-Dominion Bank and Manulife Financial Corp., said it would pay C$3.8 billion ($3.9 billion), or C$50 a share, for TMX, up from C$48 previously, according to a statement. LSE’s bid was valued at C$44.89 as of the close of trading today in London. Both exchange operators agreed yesterday to also give TMX owners a special dividend of C$4 a share if the deal closes.
The prospective buyers sweetened their offers a week before shareholders of Canada’s main bourse vote on the LSE proposal. More than $30 billion of exchange takeovers have been announced globally since October as executives look for ways to boost revenue after competition and technology improvements cut profits from stock trading and share listing.
“This is a very tricky situation because both parties face significant regulatory hurdles,” said Ed Ditmire, an exchange analyst at Macquarie Group Ltd. in New York. “Ahead of that, the best thing the management of both sides can do is put their best hand on the table and give themselves the best chance.”
TMX rose C$1.05, or 2.4 percent, to C$45.30 in the biggest one-day gain in more than a month. The stock trades at a three-year high. LSE fell 0.1 percent to 956.5 pence in London trading.
LSE-TMX needs approval from Industry Minister Christian Paradis, who is reviewing the deal to determine if it provides a “net benefit” to the country, under rules governing foreign takeovers. 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.
Maple’s new bid is valued at more than three times earnings before interest, taxes, depreciation and amortization, compared with a ratio between one and two for LSE’s revised offer, Ditmire said. That shows LSE has more room to increase its price. “TMX-LSE has a lot more dry powder,” he said.
LSE and TMX agreed to pay special dividends of C$660 million in an attempt to win support for their merger and thwart the rival Maple bid. TMX shareholders would receive a cash dividend of C$4 a share from the combined company once the takeover is completed, while LSE shareholders will get 84.1 pence ($1.35) a share, the companies said yesterday in statements.
Hearing the Message
“One of the key things we received from our shareholders was a message on the dividend rate,” TMX Group Chief Executive Officer Thomas Kloet said yesterday in a telephone interview before Maple Group increased its bid.
Investors were concerned the transaction “would result in a net decrease of their dividend rate, and we listened to that and reacted to that,” he said.
TMX will review Maple Group’s revised bid, the bourse said late yesterday in a statement.
The LSE all-stock offer is valued at C$44.89 a share, according to Bloomberg data. If the cash dividend is included, it’s valued at C$48.89, compared with C$50 a share in cash and stock from Maple Group.
Maple Group agreed to raise the cash portion of the hostile bid to as much as 80 percent from 70 percent, and offered to negotiate a reverse breakup fee if the takeover doesn’t win regulatory approval. The non-cash portion is Maple shares.
In a statement following Maple Group’s higher offer, TMX said its board will examine whether the bid “constitutes a superior proposal, or could reasonably be expected to result in a superior proposal.”
TMX and LSE sweetened its offer “because they realize their chances are slim of winning the bid,” said Mathieu Roy, a money manager at Louisbourg Investments Inc., which oversees C$1.5 billion in Moncton, New Brunswick, and holds TMX shares. “They realize the market sees the Maple bid as a better financial bid and probably has a better chance of winning approval.”
The Maple Group was formed to keep the Toronto stock and Montreal derivatives exchanges in Canadian hands. The group also plans to merge the Toronto bourse with the bank-owned Alpha equity platform, which competes with TMX.
“Maple’s offer continues to provide far greater value and certainty than the LSE takeover, as well as a stronger, more valuable and more sustainable business model for the TMX Group going forward,” Maple CEO Luc Bertrand said late yesterday in a statement.
June 30 Vote
Bertrand, a vice chairman at National Bank of Canada who once ran the Montreal Exchange, reiterated that investors must reject the London Stock Exchange offer on June 30 to support the Maple Group bid.
Maple’s investors are Toronto-Dominion, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank, Caisse de Depot et Placement du Quebec, Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan, Alberta Investment Management Corp., Fonds de Solidarite FTQ, Manulife Financial, Desjardins Financial Group, Dundee Capital Markets Inc. and GMP Capital Inc.
Institutional Shareholder Services, which advises pension and mutual funds on proposals in shareholder meetings, recommended the LSE bid. It follows a similar recommendation last week from Glass Lewis & Co.
“The strategic rationale for the merger appears to be sound,” ISS said today in an e-mailed report. “The merger should allow TMX Group to achieve the cost synergies associated with combination of technology platforms, leverage the combined company’s depth of liquidity to gain new issuer listings, and improve the company’s global competitive position.”
Maple is advised by CIBC, TD Securities, National Bank and Scotia Capital. Bank of Montreal’s BMO Capital Markets is among banks working with TMX and Royal Bank of Canada is with LSE.
“For these exchanges, they’re going to see thinner and thinner margins, so they have to get bigger and bigger to turn a profit,” said Carlo Panaccione, the co-founder of Navigation Group, which oversees about $350 million in Redwood Shores, California. “More people are trading across borders, and probably in the next 10 years about half the assets people have in the U.S. will be abroad, so it makes sense to increase the efficiencies.”