CI Faces Toronto-Dominion as TMX Investors Prepare for LSE Vote

TMX, LSE Drop Merger Pact
The logos of TMX Group Inc. and London Stock Exchange Group Plc (LSE) are displayed on a screen in the broadcast center at the Toronto Stock Exchange (TSX) in Toronto. Photographer: Norm Betts/Bloomberg

TMX Group Inc.’s biggest shareholders are lining up on both sides before a vote tomorrow that will determine whether London Stock Exchange Plc’s takeover offer for the Toronto Stock Exchange operator will succeed.

CI Financial Corp.’s William Holland, whose firm is the largest TMX shareholder, said he favors the LSE proposal. Jarislowsky Fraser Ltd. and Calgary-based Mawer Investment Management Ltd., the latter of which holds about 1.24 million TMX shares for clients, said they support a competing offer from a group of Canadian banks and pension funds. LSE needs two-thirds support from voting TMX shareholders for its C$3.29 billion ($3.4 billion) friendly bid to advance.

“It is going to be a very close situation,” said Will Harrington, a New York-based merger arbitrage analyst at Wall Street Access, a brokerage. “Obviously the vote threshold -- the 66 2/3 -- is something that can’t be ignored.”

TMX shareholders are being asked to choose between two competing visions for the owner of the Toronto bourse and the Montreal derivatives exchange. The London bid offers a chance to team up with a global partner in a consolidating industry, while the C$3.73 billion hostile bid from Maple Group Acquisition Corp. ensures the markets will be run by Canada-based executives.

Trading in TMX and LSE shares show investors are concerned regulatory hurdles from the Canadian government and provincial securities commissions may derail a merger even if it wins shareholder support. The TMX vote begins at 10 a.m. at the Design Exchange, the former equity trading floor on Bay Street in Toronto’s financial district. LSE shareholders also vote on the bid tomorrow in London.

Maple Edge

TMX fell 0.9 percent to C$43.15 in 11:12 a.m. trading on the Toronto Stock Exchange, below the London offer of C$44.23 a share before a special cash dividend of C$4 a share. The stock also trades below the C$50-a-share cash and stock Maple bid.

Still, the backing by Canada’s biggest financial firms, including Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Manulife Financial Corp., may give Maple an edge.

“I’m expecting a close vote, but I’m expecting the LSE proposal to be voted down,” said Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth Capital LLC. “The Maple Group bid is slightly better and people are underestimating the nationalistic implication of this transaction for Canada.”

“Canadians would prefer a Canadian solution to a Canadian problem,” Oshodi said.

Louder Microphone

Although Maple Group investors and group spokesman Luc Bertrand control about 6.6 percent of TMX shares, Maple Group may have additional influence beyond that, said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier Inc. in Toronto, who doesn’t own TMX shares.

“The banks tend to have a louder microphone than others,” he said.

Alison Crosthwait, who analyses exchanges as director of global trading research at Instinet LLC in Toronto, expects a close vote in Maple’s favor.

“Maple is aggressive, they want to get this done and it’s all about protecting themselves from what they perceive is a lack of control of Canadian capital markets,” said Crosthwait, whose firm competes with TMX. “It’s that aggressiveness and determination on the part of Canadians to not let this deal happen that I think will ultimately win out.”

Backers for the LSE bid include CI Financial’s Executive Chairman Holland, whose funds hold more than 7 million TMX shares, according to data compiled by Bloomberg. Holland and 10 other executives from firms including Raymond James Ltd. and Haywood Securities Inc. endorsed the LSE offer in a June 27 letter, arguing that the Maple bid stifles competition, and that the bank ownership creates conflicts of interest.

ISS Support

LSE’s offer has also been endorsed by Institutional Shareholder Services and Glass Lewis & Co., which advise mutual and pension funds on proposals in shareholder meetings.

Maple Group supporters include Jarislowsky, chief executive officer of Montreal-based Jarislowsky Fraser, and Calgary-based Mawer Investment. Jarislowsky’s firm runs funds for Renaissance Investments, which holds about 231,000 TMX shares, according to Bloomberg data. Quebec Premier Jean Charest, whose provincial regulator must approve any TMX sale, also backs the Maple proposal, he told Bloomberg News.

“To us it looks like Maple’s proposed bid is a superior offer,” Mawer’s Jim Hall said in a June 27 interview. “The value is in the larger cash portion of it, actually, and you still end up with ownership of an exchange and potentially some other pieces.”

Executives from both sides claim they have the required support to advance their deals.

“We are confident that shareholders will turn down the LSE proposal and we are confident that we are going to be able to get shareholders to accept our proposal,” Bertrand told reporters yesterday in Toronto.

TMX and LSE CEOs are equally confident.

“We expect to win on June 30,” TMX CEO Thomas Kloet said during a June 27 conference call.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE