TMX Falls After Competition Bureau Cites ‘Serious Concerns’

Maple Bid for TMX Draws ‘Serious Concerns’ From Regulator
TMX Group Inc. signage is displayed on a screen in the broadcast center of the Toronto Stock Exchange (TSX) in Toronto, Ontario, Canada. Photographer: Norm Betts/Bloomberg

TMX Group Inc. fell the most in almost three weeks after Canada’s competition watchdog said it has “serious concerns” about the proposed C$3.73 billion ($3.66 billion) takeover of the Toronto Stock Exchange owner.

TMX fell 0.7 percent to C$44.43 at 4:29 p.m. Toronto time, the biggest drop since Nov. 10. The shares slumped 8.3 percent earlier, the most intraday since Aug. 8. The offer from Maple Group Acquisition Corp., a 13-company group including banks and pension funds, values the exchange owner at C$50 a share.

The exchange operator endorsed Maple’s offer, which was made initially without TMX’s support, after failing to win shareholder approval for its deal with London Stock Exchange Group Plc. The agreement helped drive TMX shares up 21 percent this year through yesterday, the third-biggest advance among the 25 companies in the Bloomberg World Exchanges Index.

“This is a real problem,” Edward Ditmire, an analyst at Macquarie Group Ltd. in New York, said in a telephone interview today. “There are serious concerns that have to be addressed and debated, and maybe even some remedies proposed.”

The offer needs approval from provincial regulators and the competition commissioner, who hasn’t made a final decision. The Competition Bureau’s concerns were “primarily in connection with equities trading and clearing settlement,” Maple said yesterday in a statement. Maple and TMX said they will work with the bureau to address the concerns, including identifying possible “remedial measures” as long as they don’t result in a “material detriment” to the agreement.

‘Material Detriment’

“The catch here is that ‘material detriment’ as defined in the support agreement is defined very broadly and leaves the door wide open for Maple Group to walk away from the transaction,” Jeff Fenwick, an analyst with Cormark Securities Inc. in Toronto, wrote in a note to clients.

Maple wants to buy TMX and combine it with the bank-owned Alpha Group, a stock trading platform that competes with the Toronto Stock Exchange, as well as Canadian Depository for Securities Ltd., which is a securities clearinghouse. Alpha handled 20 percent of the nation’s equities trading in October, compared with 65 percent on TMX’s three markets.

The Competition Bureau’s concerns on equities trading and clearing threaten Maple’s proposal because its plan is contingent on acquiring CDS and Alpha, Macquarie’s Ditmire said.

TD Bank, Manulife

Maple, whose members include Toronto-Dominion Bank, Ontario Teachers’ Pension Plan and Manulife Financial Corp., said the Competition Bureau’s final response “may be affected by further factual information.” The group must meet certain conditions to extend the deal’s expiration date to April 30 unless it gets regulatory approvals by Jan. 31, Maple said.

“My sense is that it’s going to go through,” Thomas Caldwell, Toronto-based chief executive officer of Caldwell Securities Ltd., which oversees about $1 billion including TMX shares, said in a telephone interview. “If they fight it hard, they might still get this.”

Maple has sought a takeover of the Canadian exchange owner since May 13, when it made an unsolicited offer that challenged a friendly combination between London Stock Exchange Group and TMX. The LSE and TMX scrapped their cash-and-stock transaction on June 30 after failing to get enough shareholder support. Three weeks later, TMX agreed to negotiate with Maple and on Oct. 30 TMX’s board agreed to support the proposal.

Public Hearings

Maple and TMX said they won’t comment further and will attend a public hearing tomorrow convened by the Ontario Securities Commission in Toronto.

Canadian brokers and investors told a regulatory hearing last week in Quebec that Maple’s proposed takeover of TMX would hinder competition in capital markets. Firms including Edward Jones said in written comments to the Quebec securities regulator that integrating Alpha with TMX will limit competition and turn CDS’s clearing and settlement service into a “for-profit” business, which may drive up prices.

“The CDS thing is the stumbling block, and it will require a commitment for open accessibility and also a flat structure in costs,” Caldwell said. “To my mind, that’s going to be the challenge.”

Melanie Aitken, Canada’s antitrust regulator, is seen as a “fearless” guardian of the country’s competition rules following battles against Visa Inc. and Air Canada, suggesting she may contest the proposed sale of TMX, Orestes Pasparakis, a lawyer at Norton Rose OR LLP, said in July.

‘Serious Concerns’

“The commissioner’s serious concerns are the result of a thorough and efficient review of the proposed transactions,” Alexa Keating, a Competition Bureau spokeswoman, said in an e-mail. “This matter remains a priority for the bureau.”

If the Maple proposal falls apart, TMX’s board may have to consider alternatives to be competitive as exchanges seek to merge worldwide, Janet Ecker, president of Toronto Financial Services Alliance, said in an interview. NYSE Euronext and Deutsche Boerse AG have agreed to merge in a deal creating the world’s largest exchange operator. Tokyo Stock Exchange Group Inc. is trying to purchase Osaka Securities Exchange Co.

“It’s a strong exchange doing really, really well in its space, but they recognize that strategic partnerships of some kind or another -- no matter what they may be -- are an important part of that global growth strategy,” Ecker said from New York.

Canada’s banks may not be too troubled if the Maple transaction doesn’t go through, Caldwell said.

“The banks already achieved their end: they blew off London and the possibility of introducing new sources of capital and financing for Canadian industry, and that was the major victory,” Caldwell said. “If they have to wander home grumbling that they didn’t get this thing, I don’t think that will be too big a hurt.”

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