TORONTO (Reuters) - The architects of the London Stock Exchange's proposed takeover of TMX Group defended the transatlantic tie-up to skeptical lawmakers on Wednesday as they faced the first of a series of government and regulatory hurdles.
An Ontario legislative review of the deal that began on Wednesday is not in itself legally binding. But it will likely influence regulatory and federal government reviews that have the power to derail the LSE's C$3.1 billion ($3.2 billion) friendly takeover of TMX, operator of the Toronto Stock Exchange.
In questions to the chief executives of the two exchanges, Ontario legislators challenged the notion that the deal is necessary if TMX is going to stay competitive with other consolidating global exchanges. They echoed widespread concern that Canada would cede authority over its own financial markets if it let the deal go through.
The proposed combination has raised fears that the Toronto Stock Exchange could become a "second fiddle in its own backyard," lawmaker Gilles Bisson said as the hearings got underway in Toronto.
Economic sovereignty is a touchy issue in Canada, and these hearings come just four months after the federal government blocked BHP Billiton's $39 billion bid for Potash Corp, saying the Anglo-Australian miner's stewardship of the world's largest fertilizer maker would not benefit Canada.
But TMX CEO Tom Kloet said control and regulatory supervision of the exchange will stay in Canadian hands even after the bourse's owner is folded into the larger London-based company.
"In short...Toronto Stock Exchange will operate for all intents and purposes as before," Kloet told the all-party committee.
Speaking alongside LSE head Xavier Rolet, Kloet said the combination would give Canadian companies increased access to capital and would create a global leader in listings, particularly in natural resources.
Jammed into a packed conference room in Ontario's Romanesque provincial parliament buildings in downtown Toronto, the executives were grilled by more than a dozen legislators. Lawmakers posed pointed questions, though the overall mood was cordial.
The two exchanges have said the combined company could go on the offensive as stock market competition intensifies internationally, especially with Deutsche Boerse in takeover talks with NYSE Euronext, and the Singapore Exchange trying to acquire Australia's ASX Ltd.
Some have speculated U.S.-based Nasdaq OMX Group could jump into the fray, and Rolet was noncommittal when asked whether TMX and LSE would consider a three-way tie-up.
"I can't speculate on what might or might not happen or what we could or should do," he told reporters after the hearing.
Some worry that a three-way deal or a merger with the combined TMX-LSE down the road would further marginalize Canada's influence on the company.
Lawmakers at the hearing raised concerns that Canada's board representation at the company could be whittled down, and complained that the takeover agreement did not contain enough protections for Canadian interests.
"We may end up being in a diluted position that is not entirely to our advantage," Bisson said.
Mark McQueen, CEO of private equity firm Wellington Financial, suggested at the hearing that the government should insist on a "golden share" that would allow it to veto any future deal that threatens to dilute Canada's influence.
Following the provincial hearings, the deal will go before regulators from at least four Canadian provinces, and must also be approved by federal Industry Minister Tony Clement, who surprised the market when he halted the BHP-Potash transaction late last year.
The weight of public opinion is crucial as Ontario's governing Liberal Party trails the Progressive Conservatives in opinion polls ahead of an election in the province in October.
That said, Ontario politicians on all sides have so far been united in criticizing the proposed deal.
The complex approvals process and risks about whether it will go ahead has made investors cautious about the deal. TMX shares ended 3.8 percent below the implied offer price on Wednesday, after trading about 10 percent below the offer two weeks ago.
Additional reporting by Claire Sibonney, writing by Cameron French; editing by Peter Galloway