TMX Discount to Maple Bid Shows Regulatory Risk, Kloet Says
TMX Group Inc. (X) Chief Executive Officer Thomas Kloet said the gap between his company’s stock price and a takeover offer by a group of Canadian banks and pension funds reflects investor concerns that regulators may reject the C$3.73 billion ($3.65 billion) deal.
“Whenever you have a transaction like this, there’s a certain amount of regulatory uncertainty,” Kloet, 53, said today in an interview at Bloomberg’s New York headquarters. “That’s a factor and the market’s trying to make a judgment based on that.”
TMX is weighing an unsolicited bid from Maple Group Acquisition Corp., a 13-member consortium that includes Toronto- Dominion Bank, Canada Pension Plan Investment Board and Manulife Financial Corp. (MFC) TMX shares closed today at C$39.65, or $10.35 below Maple’s C$50-a-share cash and stock offer, which is set to expire Sept. 30 and may be extended this week.
Maple made an offer for TMX on May 13, trumping the agreement between the Toronto exchange owner and London Stock Exchange Group Plc. (LSE) LSE and TMX scrapped the combination on June 29 after failing to get enough shareholder support, leaving Maple as the sole suitor. TMX’s board on July 21 authorized management and advisers to hold discussions with Maple.
Kloet denied speculation that the Maple Group was only formed to thwart the London Stock Exchange bid.
“There is no indication from me that they’re not serious at all,” Kloet said. “Whether they’re serious and whether the regulators and Competition Bureau are going to say yes are two different things. They could be very serious but still not get approval.”
Maple’s plans include buying Alpha Group, an alternative trading platform owned by the country’s biggest banks that competes with TMX, and Canadian securities clearing house CDS Inc. Combined, the TMX exchanges and Alpha had about 85 percent market share of the number of stocks traded in Canada at the end of August, according to statistics from the Investment Industry Regulatory Organization of Canada.
The Maple plan requires approvals from four provincial regulators, including those in Quebec and Ontario, as well as the Competition Bureau.
“I don’t see the deal going through,” said Renee Colyer, a former director of research at TMX, and CEO of Toronto-based capital markets consultant Forefactor. “It’s not something that is easily explained or easily dealt with from a regulatory standpoint or an antitrust point of view.”
Melanie Aitken, who became Canada’s competition regulator in 2009, has overseen an increase of cases in which companies must make concessions on their transactions, such as selling assets, to receive approval. Lawyers and analysts have said Maple and TMX may have to accept conditions if the transaction is approved.
If the deal gets blocked, Maple can say “well, thanks, we tried,” Colyer said. “In that case, it ends up looking like the only purpose of the Maple bid was to block the LSE deal.”
Kloet called the London and Maple deals “totally different” and said he was excited about LSE’s proposal because it brought new products, markets and distribution that would be difficult for TMX to create on its own. Maple’s deal builds on TMX’s existing strategy though it includes CDS, a platform Kloet has sought.
“Both are interesting, but I like the idea of new products” tied to the LSE bid, Kloet said. “That was pretty exciting for me.”
TMX hasn’t made a recommendation on the Maple bid, and the filing for the offer still hasn’t been presented to securities regulators, Kloet said.
“I’m not interested in taking something to our shareholders something that our board doesn’t think can get approved,” Kloet said.
Shares of TMX have fallen 12 percent since they closed at a three-year high of C$45.30 in June, amid the takeover battle between LSE and Maple. The stock sank to C$39.20 on Sept. 22, the weakest level since Maple’s bid was announced in May.
“The deal is less likely given the time line of the OSC, hearings and the Competition Bureau,” said Alison Crosthwait, director of global trading research at Instinet. “We haven’t heard anything from Maple lately and the stock price is slumping.”
Maple plans to release a statement this week ahead of its Sept. 30 deadline for the bid, Maple spokesman Peter Block said Sept. 26. The company still anticipates regulatory approvals won’t be done until at least “the late fall”, Block said.
Maple last month extended the deadline for its tender offer to buy as much as 80 percent of TMX shares. Maple said in an Aug. 3 statement it intended to further extend its deadline if the regulatory approval process wasn’t completed.
“There’s a great deal of confidence that it’s working its way through the regulatory process and that the Maple Group is quite satisfied,” Canadian Imperial Bank of Commerce Vice Chairman Jim Prentice told reporters today in Halifax, Nova Scotia.
CIBC, Canada’s fifth-largest bank, is one of the Maple Group members.
To contact the reporter on this story: Doug Alexander in Toronto at email@example.com