TORONTO Talks between Toronto Stock Exchange operator TMX Group (X.TO) and a consortium of Canadian financial heavyweights could result in the former adversaries reaching a friendly deal that would help overcome key competition hurdles.
The TMX board said on Thursday it authorized official discussions with Maple Group Acquisition Corp, nearly a month after the London Stock Exchange (LSE.L) abandoned a friendly takeover offer that failed to generate enough shareholder support.
"If TMX and Maple got together, if they were to agree on something, whatever they agree on would probably have a better chance of passing competition reviews in Canada," said Ed Ditmire, an analyst with Macquarie Capital in New York.
The Competition Bureau is reviewing Maple's offer, which includes plans to integrate the Toronto Stock Exchange with the Alpha Group alternative trading system (ATS), the TSX's largest domestic competitor.
The move would result in the combined entity controlling more than 80 percent of Canadian stock trading and has raised concerns it would give TMX-Alpha too much power over listing prices.
Earlier this week, the bureau requested more information to complete its review of the proposed deal.
"It is inconceivable it should be an issue for the competition bureau, given other (ATS) players such as Chi-X and PureTrading could fill any void," said independent analyst Chris Damas.
Damas, who supported Maple's hostile offer of C$50 a share in cash and stock, totaling C$3.8 billion ($4.02 billion), expressed concern instead over whether the board make-up of a combined entity would be able to comply with existing laws, given the number of directors that will come from Maple and TMX.
"I really think this is the crux which will make or break this deal," he said.
FINDING A MIDDLE GROUND
Maple, a 13-member consortium that includes some of the country's biggest banks and pension funds, pitched itself as an all-Canadian solution to keeping TMX in Canadian hands. But its takeover of the nation's main stock exchange, as well as the related TSX Venture Exchange and the Montreal Exchange derivatives bourse, does not sit well with many independent financial firms.
"It's not as simple an issue as people let out to be," said Thomas Caldwell, chairman of Caldwell Securities, who conceded that Maple's competition hurdles were not insurmountable.
"It's about some major institutions basically trying to gain control of the pricing mechanisms. So from that perspective, let's call a spade a shovel here. It's actually a remutualization (of the TMX) with a little bit of window dressing."
Caldwell, who has not been shy about his opposition to the Maple offer and the nationalist rhetoric surrounding the deal, said he was "open" to Maple should the two sides find a middle ground that addressed concerns over access, pricing, and a promise by Maple's key members to eventually reduce their ownership over time.
With dialogue starting just two weeks before the August 8 deadline for investors to tender their shares to Maple's offer, some speculate the date could be extended as the two sides try to find a middle ground.
"It's a beginning ... The board has to engage Maple, but there's no love between (Maple's) Luc Bertrand and (TMX's Tom) Kloet," said Damas, who predicts the offer period for investors will likely be extended, given the laundry list of concerns that needed to be ironed out.
"The board is ... walking a fine line between doing their fiduciary duty and catering to executive management that might have some problems with the Maple takeover."
Among TMX's biggest concerns has been the amount of debt Maple would bring to the table. Some say Maple is keen to have Royal Bank of Canada (RY.TO) and Bank of Montreal (BMO.TO) -- who had been advisers in the LSE-TMX deal -- join the consortium. The equity they would bring could reduce Maple's leverage to a level acceptable to the TMX board.
TMX took pains on Thursday to say it was not making any recommendations to shareholders regarding the current offer, but ultimately, cash may still win the day.
"Life is a business of compromises," said Caldwell. "The deal will probably be based upon price, which is not necessarily the right thing, but we all have a responsibility to our clients to get the best price."
(Editing by Rob Wilson)