Canadian consortium the Maple Group Acquisition Corporation has surprised many market participants by continuing to pursue its takeover bid for exchange group TMX, following the collapse of the London Stock Exchange Group’s rival bid earlier this year. Yet some observers fear a concentration of powers that may not be to the advantage of end-investors, says Alison Crosthwait, director of trading research at agency broker Instinet.
Put forward in May, Maple’s C$3.8bn bid for TMX offered shareholders C$48 per share in a cash-and-equity transaction that would merge TMX with alternative trading system Alpha Group – which is owned by a consortium of Canadian institutions that includes many Maple shareholders. 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”.
However, Crosthwait is sceptical about the motives of Maple Group, which is owned by a consortium of 13 Canadian financial institutions, including the country’s big five banks, four of the largest pension funds and a number of independent brokerages.
“What would be the point of Alpha if the banks behind Maple own both it and TMX?” she asked. “They’re giving out crossed messages. They claim there will still be competition, but can we really trust them? I am concerned that if this deal goes ahead, a relatively small group of banks will dominate the market.”
The upshot of such a clique, she suggests, might well be increased trading costs in Canada. According to figures provided by Thomson Reuters, the institutions behind Maple would effectively control around 81% of the equity market share, leaving only multilateral trading facility Chi-X Canada – with around 12.2% equity market share – the only potential source of independent competition. “The whole point of Alpha was to reduce prices,” Crosthwait said. “But this deal is going to create a conflict of interest. Will the banks act in the interests of the capital markets, or in their own interests?”
The Canadian Competition Bureau is expected to subject the proposed Maple-TMX deal to strong scrutiny before allowing it to go ahead. The bureau previously asked Maple to provide additional information on its bid in July 2011. Crosthwait estimated the deal had a roughly 50/50 chance of approval.
Although TMX had officially rejected Maple’s initial bid, the consortium decided to take the deal directly to the exchange’s shareholders. On 21 July, TMX Group announced that its board of directors had authorised management and its advisors to enter into discussions with Maple. In early October, Maple filed applications with the Canadian provincial securities regulatory authorities in Ontario, Quebec, Alberta and British Columbia – meaning a final decision is expected in early 2012.
Canadian regulators are also currently considering a raft of potential changes, including whether or not to impose a full ban on all forms of internalisation, changes to the rules for trading OTC instruments, adaptations to DMA rules and whether or not to impose charges on exchanges for message traffic – a rule potentially curbing high-frequency trading in the country’s stock markets. Responses to the Canadian Securities Administrators’ consultation paper on dark trading are expected by 27 October, with implementation of the new rules expected in Q2 2012.
On 7 October, Maple extended its offer to TMX shareholder to 31 October.
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.
Alpha Group was established in 2007 by nine of Canada’s major banks: BMO Nesbitt Burns, Canaccord Capital, CIBC World Markets, Canada Pension Plan Investment Board, Desjardins Securities, National Bank Financial, RBC Dominion Securities, Scotia Capital, and TD Securities.