OTTAWA/TORONTO Canada faces some tough 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 group of Canadian banks and pension funds called Maple Group Acquisition Corp, is dependent on the TMX swallowing up 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 independent Competition Bureau and provincial securities commissions, while the previous proposal, a $3 billion offer from the London Stock Exchange (LSE.L), requires green lights from provincial regulators as well as Canadian Industry Minister Tony Clement.
Clement last year 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 plus 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.
"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.
LONG TIME COMING
The Maple Group - whose name evokes the nation's most patriotic symbol, the maple leaf - took root a month to the day after London made a February 9 bid for the TMX Group.
That was when the four banks in the Maple Group penned a strongly worded letter opposing the LSE deal, saying it would hurt Toronto's ambitions to become a global financial services hub and shift control of Canadian capital markets across the Atlantic.
Bertrand said formal discussion came soon after the institutions decided to form the group and move on the TMX.
"That was when we sat down and said, OK, fine," he said on a call with media on Monday. "We tested the business model, we did our analysis, and I think everyone did that individually, and we all came to the conclusion that, first of all, this would be good for Canada, but secondly, it's also going to be a very good business."
"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.
GLOBAL NATURE OF EXCHANGE BUSINESS
The Maple Group is expected to argue that the efficiencies of its proposal outweigh any anticompetitive effects, lawyers say. It will also emphasize the global nature of the exchange business.
As if to anticipate that, Bertrand repeatedly referred to the cost benefits of the proposed deal, and pointed at increased competition from U.S. trading venues into Canada.
"To isolate Canada and say, OK, well we're just going to consider competition issues and limit that consideration to our domestic business, is I think incorrect," he said. "I think the analysis has to be done from the North American standpoint.
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 proposal, 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.
(Editing by Janet Guttsman)