TORONTO The London Stock Exchange's (LSE.L) bid to take over Canada's TMX Group (X.TO) is likely to navigate through a battery of regulatory reviews and emerge intact, even though investors are nervous about its chances.
Canada's fragmented regime of provincial and territorial regulators means an especially complex process will unfold over the next several months.
The deal will involve a review by the federal government in addition to oversight by at least four provinces: Ontario, Quebec, Alberta and British Columbia. It may take until late in the year for the deal to run the gauntlet.
The drawn-out process, coming after the federal government's denial of BHP Billiton's (BHP.AX) bid for Potash Corp (POT.TO) last year, has TMX shareholders feeling less than confident about the deal's chances of surviving.
Shares of Toronto Stock Exchange owner TMX Group (X.TO) fell 1.3 percent to C$40.75 on Tuesday. The stock is now 8.5 percent below the implied per-share price of C$44.53 offered by LSE, suggesting investors are hedging their bets.
Even so, arguments against the deal are unlikely to pick up much traction, analysts say, particularly when considered in light of the proposed merger of Deutsche Boerse (DB1Gn.DE) and NYSE Euronext NYX.N, unveiled on Tuesday.
In the end, job guarantees may be enough to carry the day.
"I just don't think the Canadian regulators would want TMX to be disadvantaged in the global context by not being able to participate in the economies of scale that comes with consolidation," said Ed Ditmire, a New York-based analyst with Macquarie Research.
The takeover, announced last week, would create a global exchange player strong in resource listings and with a market capitalization of just under $7 billion. LSE shareholders would hold 55 percent of the combined entity.
"It's trading slightly down, which means there is some concern about the regulatory bumps, but people aren't that worried," said one trader in the stock who could not be named.
Canadian Industry Minister Tony Clement said late on Monday the Conservative government would review the deal, kicking off a months-long approval process.
Analysts say the deal should clear that hurdle, even though some politicians have come out against the proposal.
That has some observers worried that the LSE-TMX deal will go the way of the ill-fated BHP-Potash deal, which Ottawa blocked on grounds it would bring no "net benefit" to Canada. The government will apply the same litmus test to the LSE bid.
"The main risk lies with the politicians, and it's very hard to gauge which way the politicians will sway," said CIBC analyst Paul Holden, who refused to predict whether the deal would go through.
ONTARIO, QUEBEC APPROVALS
Ontario Finance Minister Dwight Duncan has publicly voiced his reservations about the deal, noting Borse Dubai BRSDB.UL will hold more than 11 percent of the combined entity. His main demand is likely to be job guarantees.
In addition provincial regulators could raise concerns, but like Duncan, observers believe they would be content with enhanced influence over the combined company.
While based in Toronto, TMX's derivatives exchange is located in Montreal, which means Quebec's Autorite des marches financiers must also sign off.
"You're going to get some blowback on what it means for jobs in Quebec, and that'll be easily dealt with - they'll cut a deal," said Brendan Caldwell, CEO of TMX shareholder Caldwell Securities.
CIBC's Holden agreed the LSE and TMX could offer jobs guarantees and presence on the board as concessions to provinces that throw up roadblocks to the deal.
TMX's energy exchange in Alberta and the junior TSX Venture Exchange in British Columbia give regulators in those provinces some sway, but lawyers said at this point the approvals process was still unclear.
British Columbia Finance Minister Colin Hansen said on Tuesday the province it might support the takeover, but said the deal still needs to be studied.
On a federal level, the political concerns that dogged the Potash bid -- worries about job losses in the resource-rich province of Saskatchewan -- are not expected to play the same role in the TMX takeover.
"Potash was refused because it was so important to the local economy," said Caldwell.
"But Toronto? Nobody cares about Toronto."
(1 British Pound=$1.59 Canadian)
(Additional reporting by Pav Jordan, Solarina Ho, Ka Yan Ng, and Claire Sibonney in Toronto, and Allan Dowd in Vancouver; Editing by Frank McGurty)