TMX Deal Puts Canada Finance Firms in Charge of Exchange

Some of Canada’s biggest financial institutions gained ownership of the country’s main stock exchanges, derivatives bourse and securities clearing house after sealing a C$3.73 billion ($3.71 billion) takeover of the Toronto Stock Exchange owner.

Maple Group Acquisition Corp., whose 12 members include Toronto-Dominion Bank, Ontario Teachers’ Pension Plan and Manulife Financial Corp., yesterday acquired 91 percent of TMX Group Inc. shares from investors for C$50 each in a cash-and-stock offer. Maple today closed its takeovers of the Canadian Depository for Securities Ltd. clearing house and exchange operator Alpha Trading Systems.

Maple plans to buy the rest of TMX stock and integrate the company with CDS and the bank-owned Alpha, formerly TMX’s biggest competitor. The Toronto-based company will now need to look abroad for growth, analysts and investors said.

“Now that they’ve consolidated most of the exchange-traded world in Canada into one company, how do you outgrow just the broader Canadian capital markets?” Ed Ditmire, an exchange analyst with Macquarie Group Ltd. in New York, said in an interview. “They’ll have to look internationally for more and more acquisitions, partnerships or new business ventures.”

Maple’s transactions combine Canada’s main equities markets -- the Toronto Stock Exchange, TSX Venture Exchange and Alpha Exchange -- with Montreal’s derivatives bourse and the country’s securities clearing services. TMX joins Deutsche Boerse AG, Hong Kong Exchanges and Clearing Ltd. and Australia’s ASX Ltd. among exchanges that integrate trading and clearing.

‘Integrated Exchange’

“Having an integrated exchange as a result of combining the clearing and the trading will allow management to develop expanded services,” Luc Bertrand, a Maple director, said in an interview. “We’re going to have much greater ease in reaching out to the participants and offering expanded services when it comes to risk management, better clearing and so forth.”

TMX plans approximately C$20 million of annual savings starting in 2014 from its combination, Chief Executive Officer Thomas Kloet said in a July 27 earnings call. The company will record C$24 million of costs from combining overlapping businesses and consolidating technology. Kloet becomes CEO of Maple, which will be renamed TMX Group Ltd. on Aug. 10.

The combined TMX may earn C$4.16 a share in 2013 and C$4.80 in 2014, and have a return on equity “in the high single digits” during the next couple years, RBC Capital Markets analyst Geoffrey Kwan said in a July 20 note. It may have adjusted per-share earnings of C$3.15 in 2012, Kwan, who rates TMX a sector perform, said in a July 30 note.

Strong Entity

“I’m pretty happy,” Jim Hall, chief investment officer of Mawer Investment Management Ltd., which sold 2.1 million TMX shares to Maple last week, said in a telephone interview from Calgary. “This is a really strong entity with really strong market positions in Canada and opportunity to grow abroad. What more do you want?”

TMX is “committed” to exploring opportunities to grow internally and through takeovers, investments and partnerships, Maple said in a July 20 filing.

“TMX Group is actively engaged in discussions regarding various potential transactions, some of which, if completed, would be material,” the company said.

The TMX takeover follows at least $32 billion of scuttled global deals among bourses in the past two years, including Singapore Exchange Ltd.’s failed October 2010 bid to buy ASX, according to data compiled by Bloomberg.

Unsolicited Bid

The transaction ends a 15-month effort by some banks and pension funds to buy TMX. Maple made an unsolicited bid in May that challenged TMX’s friendly combination with the London Stock Exchange Group Plc. The LSE deal collapsed in June 2011 after failing to get enough shareholder support, leaving Maple as the sole suitor.

TMX set a shareholders’ meeting for Sept. 12 to approve the exchange of remaining TMX shares for Maple stock. Shareholders will own between 28 and 42 percent of the combined company.

The new company will be majority held by four of Canada’s six-biggest banks, the country’s four largest pension funds and four other firms. Royal Bank of Canada, the country’s largest lender, didn’t join Maple because it advised LSE last year; Bank of Montreal, the fourth-biggest bank, isn’t part of Maple because it is TMX’s adviser.

Global Perceptions

The bank ownership may reinforce global perceptions that the country’s equity markets lack competition, which could drive away foreign brokers from trading in Canada, said Renee Colyer, CEO of consulting firm Forefactor Inc.

“We may become a less-attractive market to any external parties,” Colyer, former director of research at TSX Group, said in an interview. “We’ll be perceived more closed.”

TMX exchanges and Alpha combined had 85 percent of the market for stocks trading in June, based on statistics from the Investment Industry Regulatory Organization of Canada. Chi-X Canada, an alternative trading system majority owned by Nomura Holdings Inc., had 8.4 percent market share.

Maple’s takeover may provide opportunities for the four-year-old Chi-X Canada platform, Tal Cohen, CEO of Chi-X Global Holdings LLC, said in an interview.

“Participants are looking to support a market like Chi-X that not only offers better pricing and better trading efficiencies, but one that keeps the incumbent exchange -- now given its size and ownership -- honest,” Cohen said. “At the end of the day, Maple is good for Canada, but we still think that competition is important to ensuring that Canada is vital, not only on a regional but a global stage.”

Laurence Booth, a University of Toronto finance professor, sees Maple’s takeover as going “back to the future”. The Toronto Stock Exchange was once a private company with seats held by Canada’s biggest banks until its November 2002 transformation into North America’s first publicly traded exchange.

“We’ve gone almost full circle, in that the owners of what will be the new exchange are essentially the biggest institutions in Canada,” Booth said.

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