TORONTO A Canadian financial consortium is still negotiating terms of a side deal it considers crucial to its plan to take over TMX Group and bring most of the country's major exchanges under a single roof, months after the proposal came to light.
In agreeing to pay C$3.8 billion ($3.72 billion) for TMX, the operator of the Toronto Stock Exchange, Maple Group stipulated that it would also take over Alpha Group, the TMX's main domestic competitor. The sweeping proposal would give the enlarged group 80 percent of all Canadian equity trades.
But the two sides are still far apart on price, the Globe and Mail newspaper reported on Friday, citing people familiar with the situation.
Investors generally agreed the issue was not a deal-breaker but some say it could complicate the overall proposal.
"The challenge is how do you value Alpha?," said Thomas Caldwell, chairman of Caldwell Financial Ltd and a TMX shareholder. "Clearly they're going to have to get an independent valuation."
Any negotiations over Alpha are bound to be tricky. Not only are many of the 13 Maple members among the biggest customers of TMX and Alpha, they are also among the institutional investors that founded Alpha in 2007 as an alternative trading venue.
According to the Globe, the two sides are still far apart. Maple is offering about C$100-C$200 million for the exchange, while Alpha is looking for about C$450-C$600 million, the paper said.
Alpha Chief Executive Jos Schmitt would neither confirm or deny elements of the report, but he said negotiations over Alpha's valuation were ongoing.
"We are in discussions with Maple," said Schmitt. "It's totally inappropriate to share this type of information in public, and I really have no comments about it."
In June, Maple said the two sides could go to binding arbitration if they could not agree on what Alpha is worth. It also said an independent committee of Alpha shareholders and TMX-Maple representatives would negotiate the selling price.
"Discussions are ongoing between Alpha and Maple," said Maple Group spokesman Peter Block on Friday, declining further comment on the newspaper report.
The Maple Group consortium is comprised of four of Canada's top banks, five of the country's largest pension funds and a range of leading financial services firms, including North America's largest life insurer, Manulife Financial.
Alpha's profile went up a notch on Thursday when it won exchange status from the Ontario Securities Commission, enabling it to boost profits through new business channels such as stock listings.
Caldwell said the issue could become especially thorny now that Alpha has gained exchange status.
Any agreement on Alpha's price will likely hinge on how much business the new exchange gets from Canada's big banks, he said.
"Remember Alpha's biggest customers are the Canadian chartered banks, who by the way, are attempting with others to buy the Toronto Stock Exchange," he said. "What's Alpha worth if the banks do all their trading on the Toronto Stock Exchange. How much volume do they lose when they lose their biggest customers?"
By contrast, Stephen Jarislowsky, a billionaire investor and chief executive of Jarislowsky Fraser Ltd, said the Alpha valuation debate isn't insurmountable. "I would characterize it as a tempest in a tea pot," he said.
Maple has set regulatory approval of the Alpha acquisition as a condition of the Alpha deal, but reaching a commercial agreement is another matter.
When Maple raised its TMX bid in June, it valued Alpha at between C$137 million and C$169 million. Some newspaper reports cited values as high as C$1 billion. ($1 = 1.0222 Canadian dollars)
(Reporting by Pav Jordan and Jennifer Kwan; Editing by Frank McGurty)