DEALTALK-Canada facing tough choices on bids for exchange

Mon May 16, 2011 11:27am EDT

* Canada faces choice of takeover or domestic monopoly

* Competition Bureau would have to review Maple Group bid

* Industry Minister already mulling foreign takeover move

By David Ljunggren and Pav Jordan

OTTAWA/TORONTO, May 16 (Reuters) - Canada faces some unpalatable decisions over the fate of the Toronto Stock Exchange -- does it allow a foreign takeover, or should it opt for a deal giving the country's biggest banks a near monopoly position?

A C$3.6 billion proposal for exchange operator TMX Group (X.TO), from a specially created group of Canadian banks and pension funds called Maple Group Acquisition Corp, is dependent on the TMX swallowing up rival Alpha Group -- an alternative trading system that has been eating into TMX market share.

The Maple proposal would create an entity with more than 80 percent of the market, posing a new set of problems for the Conservative government and regulators.

"(It) might create issues around monopolistic and anti-competitive structures in that the combined entity would control the vast majority of exchange transactions in Canada and pricing power would be firmly entrenched," said Darryl Levitt, a mergers and acquisitions expert at Macleod Dixon.

A formal Maple bid will need approval by the Competition Bureau, while the previous proposal, a $3 billion offer from the London Stock Exchange (LSE.L), requires green lights from provincial regulators as well as from Canadian Industry Minister Tony Clement.

Clement last year controversially blocked a $39 billion bid by BHP Billiton (BHP.AX) for Canadian fertilizer producer Potash Corp (POT.TO). That prompted critics to complain that the government, which prides itself on being pro-market, was in fact not open for business.

Yet Clement also has to bear in mind the potential backlash from letting Canada's main stock exchange operator fall into the hands of foreign buyers, especially since the Conservatives say they want more choice for consumers.

The one benefit for the ruling Conservatives is that they won a majority government on May 2, giving them a four-year term on power. They could calculate that, however great the unhappiness over the final decision, the issue would be dead politically by the time voters went to the polls in 2015.

The Maple Group says it is offering a "Made in Canada" solution that will increase efficiencies and benefit consumers. [ID:nN16280006]

"It presents a clear path to creating additional value by optimizing the balance sheet, margin expansion, improved multiple potential and the ability to pursue international growth opportunities," said Luc Bertrand, vice-chairman of National Bank of Canada, one of key players in the proposal.

A formal bid for TMX would have to be reviewed by Canada's independent Competition Bureau, which would have an initial 30-day period to review the deal.

If needed, the bureau could ask the parties for more information. Once the additional data had been submitted the bureau would have another 30 days to make a determination.

"If there was any notion at all that the bureau will clear this because they are creating a national champion, I would say that is just not on," a lawyer with knowledge of the transaction told Reuters.

"If they clear this it will be because they are persuaded that there won't be a substantial lessening or prevention of competition," said the lawyer, who could not be named due to company policy.

The Competition Bureau technically reports to Clement but he has virtually no say over how it is run or the decisions it takes. The bureau tries to work with the parties involved to make a proposed deal acceptable.

If the bureau turned down the Maple Group bid, the backers could either give up or push ahead. In the latter case the Commissioner of Competition would turn to the Competition Tribunal to seek an injunction banning the deal.

In the United States, Nasdaq OMX Group Inc (NDAQ.O) and IntercontinentalExchange (ICE.N) withdrew their hostile $11.3 billion bid for rival NYSE Euronext NYX.N on Monday, citing opposition from U.S. antitrust regulators. [ID:nN16265562] (Editing by Janet Guttsman)

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