Despite TMX's rejection of a C$3.6 billion (US$3.69 billion) bank-led counter bid, the London Stock Exchange Group (LSEG) must amend its own offer for the Canadian exchange group to maintain shareholder support, says Alison Crosthwait, managing director, global market structure research at agency broker Instinet.
Put forward earlier this month by the Maple Group Acquisition Corporation, the counter bid offers shareholders C$48 per share in a cash-and-equity transaction that would merge TMX with the Alpha Group alternative trading system and guarantee Canadian majority ownership.
Participants in Maple include Alberta Investment Management Corporation, Caisse de dépôt et placement du Québec, Canada Pension Plan Investment Board, CIBC World Markets, Fonds de solidarité des travailleurs du Québec, National Bank Financial, Ontario Teachers’ Pension Plan Board, Scotia Capital and TD Securities. According to a press release issued on 15 May, a successful bid would result in existing shareholders of the TMX Group owning approximately 40% of Maple’s outstanding shares with the consortium's pension fund investors and bank-owned investment dealers owning approximately 35% and 25% respectively. No shareholder of Maple would own more than 10% of total shares outstanding.
TMX officially rejected the offer last Friday, on grounds that it would increase the firm's leverage, lacked adequate detail on future strategy, carried significant execution risk and placed “regulatory risk” on TMX and its shareholders.
Crosthwait said that many of TMX's criticisms “would likely apply equally” to the LSEG deal, which is officially endorsed by the TMX board but currently offers shareholders C$10 less than Maple's proposal. She suggested that the LSEG would face pressure to match or at least come close to Maple's offer to maintain credibility with shareholders, but acknowledged that the LSEG-TMX proposal is still in a relatively strong position.
“If Maple has such a great deal to offer, why didn't they do it 6 months ago? It's not a great standalone deal, it's a reaction; the banks just don't want the LSEG getting its hands on TMX,” said Crosthwait. “They're not going to save any money by merging Alpha with TMX. It's not going to broaden TMX's trading activities out much either. The inclusion of clearing facilities under the Maple proposal will broaden it slightly, but that's all.”
Maple intends to integrate Canada's national securities depository, CDS Clearing and Depository Services, with Alpha and TMX, to create an “integrated trading and clearing exchange for equities, bonds, energy products and derivatives in both exchange-traded and OTC markets”. A merger between Alpha Group and TMX would give the combined entity an 85% equity market share. As of 23 May 2011, Alpha accounted for approximately 17.2% of the market, while TMX had some 67.2%, according to Thomson Reuters equity market share reporter.
The LSEG-TMX deal is currently being processed by Canadian federal and provincial authorities, following the initiation of the application process on 29 April 2011.