BAY STREET-Maple's embrace seen tough for TMX to elude

Sun Jul 10, 2011 9:00am EDT

* Bay St bank "guard dogs" make white knight bid unlikely

* Shareholders seen succumbing to C$50/share bid

* A friendly deal would help overcome antitrust hurdle

* Leverage, regulatory hurdles remain shareholder concerns

By Solarina Ho

TORONTO, July 10 (Reuters) - Canada's largest stock market operator will likely succumb to Maple Group's C$3.8 billion ($3.96 billion) takeover bid as Bay Street's bank "guard dogs" scare off white knights and shareholders opt for hard cash over promises of growth.

While some markets watchers speculate a rival bid could still surface for TMX Group (X.TO), operator of the Toronto Stock Exchange, analysts and fund managers say few players can match the financial firepower of the Maple Group consortium.

The group, which includes some of Canada's biggest bank and pension funds, became the sole bidder for TMX following the collapse last month of the London Stock Exchange's (LSE.L) friendly takeover offer.

"Any party would find negotiating a combination with the TMX to be incredibly tricky with the kind of guard dogs of the banks in front of them," said Ed Ditmire, an analyst at Macquarie Capital in New York.

While Maple was born as an attempt to block an LSE takeover of TMX, the LSE's departure does not seem to have weakened its resolve.

Luc Bertrand, chief representative of Maple, told Reuters on July 6 the group hopes to complete its acquisition of TMX on friendly terms, but is "fully committed" to getting the deal done. [ID:nN1E765164]

Bertrand also said Maple's existing hostile bid is "as strong as you can possibly imagine", suggesting it has little fear of a foreign contender like Nasdaq .OMXC20 stepping in.

"Even though (Nasdaq) seem to be very aggressive, I'm not sure they have anymore capital than the LSE had to put toward a better deal," said Chris Damas, an independent Ontario-based analyst. "They would be outgunned by the Maple Group."

Still, Damas believes there's a slim chance LSE could come back with a partner that has a bigger bank account.

CASH IS KING

With no serious white knights on the horizon, Maple is focused on overcoming key hurdles to its bid.

As it stands, the Maple bid needs 70 percent of shareholders to tender their shares by Aug. 8. The offer works out to C$50 a share in stock and cash. TMX Group shares closed at C$44.15 in Toronto on Friday.

"If we get (C$50/share) in September, it's hard to beat that kind of summer return. Plus the dividend," Damas said.

"Bertrand said he didn't have to raise the offer price -- who can blame him? He's the only game in town right now."

Not all shareholders will succumb easily, however.

Some express concern over the amount of leverage Maple brings to the deal, and say this may be why the group is keen to have Royal Bank of Canada (RY.TO) and Bank of Montreal (BMO.TO) join the consortium.

Those two big banks were advisors in the LSE-TMX deal. The equity they would bring to Maple if they joined the consortium could reduce its leverage to a level acceptable to the TMX board.

FRIENDS WITH BENEFITS?

Canada's increasingly aggressive competition watchdog, led by a tenacious former litigator, also could pose a major obstacle to Maple's bid. [ID:nN1E76411R]

Maple hopes to integrate Canada's largest alternative trading platform, Alpha, which is also owned by many of the same Maple members, with TMX. Critics say this would give the group too much control of the market.

Yet many think Maple's regulatory campaign could be given a boost if it wins over TMX management, which reacted coolly to the Maple bid and has touted its growth prospects as a stand-alone entity. [ID:nN1E75T0MW]

"If you have both parties on board trying to lobby and make the best case -- that this combination is acceptable from an antitrust perspective -- it would go more smoothly than if TMX was brought into it kicking and screaming," said Macquarie's Ditmire.

The TMX may try to build a case for independence through managing its leverage more aggressively, returning more cash to shareholders and efficiency programs.

But market watchers said the feasibility of such a plan remains to be seen, and in the end TMX management may have no choice but to acquiesce and accept a friendly deal.

"Unless (TMX CEO Tom) Mr. Kloet comes up with something that makes real sense to shareholders, I can't see how with a $50 offer on the table, how he can fight back unless he can come up with a rabbit out of the hat," said Stephen Jarislowsky, the billionaire investor and chief executive of Jarislowsky Fraser Ltd.

($1=$0.96 Canadian) (Editing by Jeffrey Hodgson and Peter Galloway)

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