Canada banks put heft behind opposition to TMX deal

TORONTO Wed Mar 9, 2011 6:01pm EST

London Stock Exchange CEO Xavier Rolet (L) and TMX Group CEO Tom Kloet speak to the media in an overall view of the TMX Broadcast centre regarding the merger of the TSX and the LSE in Toronto, February 9, 2011.REUTERS/Mark Blinch

London Stock Exchange CEO Xavier Rolet (L) and TMX Group CEO Tom Kloet speak to the media in an overall view of the TMX Broadcast centre regarding the merger of the TSX and the LSE in Toronto, February 9, 2011.

Credit: Reuters/Mark Blinch

TORONTO (Reuters) - Some of Canada's big banks are speaking out against London Stock Exchange's proposed C$3.1 billion ($3.2 billion) takeover of TMX Group, raising a formidable new obstacle to the deal's approval.

At an Ontario hearing on Wednesday, bank executives echoed criticism that the deal will hurt Toronto's status as a global financial center, and ultimately harm the prospects of Canadian companies looking to raise capital on public markets.

"While this has been billed as a merger of equals ... it is not," said Bob Dorrance, head of the investment bank unit of Toronto-Dominion Bank, which has led the banks' charge against the deal. "The TMX will now report to the LSE-TMX."

Opposition from the banks, which dominate capital markets activity, will add to the pressure on Ottawa to veto the deal.

The Conservative government last year blocked BHP Billiton's takeover of Potash Corp following ardent opposition in Potash's home province of Saskatchewan.

In Ontario, home base for the TMX's Toronto Stock Exchange, Finance Minister Dwight Duncan has spoken out against the deal, raising pressure on Canada's securities regulator to block it. The transaction faces a multitiered approval process at provincial and federal levels.

The federal government's review will begin as soon as the government receives an application for approval.

Six big lenders dominate the banking sector and federal laws protect the banks from foreign takeovers. That gives them a hefty stake in assuring Toronto grows as a financial hub.

The big banks make billions of dollars in profits from domestic retail operations, wealth management and investment banking and they are shareholders in Alpha Group, an alternative trading system that has stolen TMX market share since its launch in 2007.

The banks' criticism is not unanimous, however.

Royal Bank of Canada and Bank of Montreal, which both have advisory roles in the deal, back it.

While TD and National Bank of Canada were strongly opposed, officials from Canadian Imperial Bank of Commerce and Bank of Nova Scotia appear to be OK with the transaction, but in a slightly different form.

"We're talking about a very, very critical part of the financial services structure and people have to be very thoughtful about how that type of transaction is entered into," Phil Smith, deputy head of investment banking at Scotia Capital, told Reuters outside the hearings.

The banks' arguments were spelled out in a letter obtained by Canadian media.

A copy of the letter shown on the National Post newspaper's website gave endorsements from TD, CIBC and National Bank. An earlier media report had said Scotiabank had also signed.

Shares of both TMX and LSE have weakened as opposition to the transaction has grown.

As of Wednesday, the deal valued TMX at C$41.46 a share, about 6.1 percent above the current stock price of C$39.07.

COMPLEX PROCESS

LSE shareholders would hold 55 percent of the combined entity -- a transatlantic exchange with market capitalization of about $7 billion. The new exchange operator would have the world's largest number of mining, energy and other resource companies in its stable of listings.

The exchange operators say the deal would give companies better access to capital and offer Canadian markets a competitive advantage as the global industry consolidates.

"We think that our proposed merger will deliver significant opportunities for growth for the Canadian capital markets," TMX spokeswoman Carolyn Quick said on Wednesday in an email.

(Additional reporting by S. John Tilak and David Ljunggren, Writing by Cameron French; editing by Janet Guttsman and Jeffrey Jones)

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