UPDATE 3-Canada's TMX posts profit, first results post-takeover

Fri Nov 9, 2012 3:16pm EST

* To focus on integration of Alpha and CDS, paying down debt

* Still looking at possible acquisitions

* Alpha to continue to operate as marketplace, but not listing venue

* TMX to cut 100 jobs over next 12 months

* Posts adjusted Q3 EPS of C$0.67 per share

By Solarina Ho

TORONTO, Nov 9 (Reuters) - Canada's TMX Group Ltd will focus on paying down C$1.5 billion ($1.50 billion) in loans, even as it looks for chances to expand its business through acquisitions, the operator of the Toronto Stock Exchange (TSX) said on Friday.

TMX reported a third-quarter profit in its first quarterly statement since it was taken over by a consortium of major Canadian financial institutions, but said earnings were hurt by a slowdown in capital markets activity and uncertain macroeconomic conditions.

"It's been generally a tough summer across the exchange landscape," said Ed Ditmire, an analyst with Macquarie Research.

Chief Executive Tom Kloet, who has continued to lead the company since its acquisition, told analysts on a conference call that TMX is focused on paying down its large debt load related to the takeover and integrating former rival Alpha, as well as clearinghouse Canadian Depository for Securities Ltd (CDS).

Alpha will continue to operate as a marketplace, but not as a listing venue, Kloet said, adding that 100 jobs will be cut over the next 12 months as part of the integration process. TMX has 1,344 employees overall.

Despite the company's post-takeover focus on bringing Alpha and CDS into its fold, company executives said they will continue to look for new avenues of growth.

"The marketplace is moving and there will be opportunities out there that will be very interesting to us ... whether it's domestically or internationally," Kloet said.

"We are very focused on integration but we're still watching these opportunities come forward. Our pencil is very sharp."

TMX, which celebrated its 160th anniversary last month, was in talks earlier this year to buy U.S. stock market operator Direct Edge Holdings LLC, a top-four player in the United States as measured in trading activity.

"I don't think M&A is on the wish list of the TMX shareholders right now," said Ditmire, noting that investors will be happier to see the company lower debt and return more capital instead of making acquisitions.

TMX's dividend this quarter was unchanged at C$0.40, and company executives said there were no plans to increase it at present.

The exchange operator, which controls more than 80 percent of Canadian stock trading by volume and value following the C$3.8 billion ($3.81 billion) takeover by Maple Group, has made no secret of wanting to expand globally. It currently has around 350 global listings, roughly half of which are U.S.-based.

In addition to the Toronto Stock Exchange, TMX operates the TSX Venture Exchange for small capitalization stocks, the Montreal Exchange for derivatives, and other options and energy markets.

COMPLEX QUARTERLY RESULTS

The third quarter report included results of TMX Group Inc from Aug. 1 to Sept. 13, reflecting TMX Group Ltd's 80 percent ownership of TMX Group Inc at that time. For the rest of September, results were included as a subsidiary of TMX Group Ltd.

TMX reported net earnings of C$15.3 million, or 53 Canadian cents per share. A year earlier, when it took an acquisition-related charge, it posted a loss of C$13.3 million, or C$109.79 per share. TMX said the year-over-year comparisons were of little use for evaluating operating performance.

On an adjusted basis, the company earned 67 Canadian cents per share in the latest quarter.

Revenue was C$162.3 million, below analysts' expectations. TMX Group Inc had revenue of C$167.8 million in the same period last year.

Revenue in the most recent quarter was hit by lower listing fees from initial public offerings (IPOs), secondary offerings and ongoing listing fees.

"It appears that the global economic recovery remains fragile, moving at what some would call a glacial pace," said Kloet, who declined to provide quarterly guidance.

"It is also evident that this situation is having pronounced impact both on companies that are looking to go public and on equity investor confidence."

Global equity markets have been hit by a slow trading environment amid worries about global economic growth.

On Tuesday, NYSE Euronext, parent company of the New York Stock Exchange, reported its weakest equity trading levels in years, and analysts expect lower profit from other global exchanges including the London Stock Exchange.

Combined total trading volume for the TSX, TSX Venture Exchange and TMX Select slumped 24 percent in the third quarter compared with a year ago, and are down 26 percent year-to-date, TMX said during the call.

Total volume on Alpha tumbled 35 percent for the quarter, down 38 percent year-to-date. CDS, whose operations are dependent on trading activity in Canadian equity marketplaces, also saw the total number of trades processed fall dramatically.

BOX trading volume in the U.S. options market also fell during the quarter, but decreased less than the overall industry volume, indicating some market share gains.

Financing for IPOs has plunged 68 percent so far this year.

"Trying to find new avenues of growth in this environment remains pretty difficult," Ditmire said.

TMX shares, which have fallen about 2.8 percent since the takeover was finalized in mid-September, were up 24 cents at C$48.90 on Friday afternoon on the Toronto Stock Exchange.

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