TORONTO A C$3.8 billion ($3.83 billion) bid to take over the operator of the Toronto Stock Exchange came two steps closer to winning provincial approval on Thursday, driving up shares of TMX Group (X.TO) even though a competition review could still scupper the deal.
In the province of Quebec, Autorité des marchés financiers said it intends to approve the proposal by Maple Group, a consortium of 13 banks and other financial institutions, despite concerns it would create a near-monopoly in Canadian securities trading.
In a separate statement, Maple said the Ontario Securities Commission is drafting terms and conditions that could allow the OSC to approve the deal. A 30-day public comment period will follow before a final decision by the provincial regulator.
The so-called recognition orders suggest that Maple is closer to resolving any objections that the regulator covering the financial hub of Toronto may have raised since the proposal was unveiled.
"It sounds like they may have some sort of a deal," said Doug Clark, an expert in market structure and managing director of research at Investment Technology Group. "Maple Group and the OSC may have agreed on some sort of terms to get this thing through."
Luc Bertrand, vice-chairman of National Bank Financial, a member of the consortium, said he thought the drafting of the orders by the OSC was significant.
"There's a view that what the Maple proposal is driving towards is philosophically fine," Bertrand said in an interview with Reuters. "That's how I read this.
TMX Chief Executive Tom Kloet said the developments give the deal some momentum. "Having both Quebec and Ontario in a position to approve it is an important step," he said on the sidelines of a futures trading conference in Boca Raton, Florida.
The OSC, Canada's main securities watchdog, said it is forging ahead in the review process and crafting an enhanced regulatory framework for the proposed entity, and that the draft orders are expected to be published in April.
"As these issues are novel and complex, it is important to seek comment from the public before making a final decision on the recognition orders," Susan Greenglass, the OSC's director of market regulation, said in an e-mail statement.
COMPETITION CONCERNS PERSIST
Still, the road to approval remains long. The deal must still win approval of provincial regulators in Alberta and British Columbia. As well, the federal Competition Bureau said on Thursday that it has serious concerns about the proposed takeover, repeating a view expressed in November.
If its bid is successful, Maple would control some 85 percent of Canadian stock trading, and drastically alter the structure for clearing and settling transactions.
In addition to the exchanges already owned by TMX, the plan calls for the acquisition of Alpha Group, the TSX's biggest competitor, as well as Canadian Depository for Securities, or CDS, a clearing house run by some of the banks that belong to Maple.
"A significant and material change to the competitive consequences to the proposed transaction would be required to sufficiently address the commissioner's serious concerns," Competition Bureau spokeswoman Alexa Keating said on Thursday.
Quebec, home to TMX's Montreal Exchange for derivatives, and Ontario, home to the Toronto Stock Exchange and the small-cap TSX Venture Exchange, held separate hearings on the deal late last year. Regulators have been silent about their intentions since then, making investors uneasy.
On Thursday, TMX shares finished the day up C$1.34, or 3.1 percent, at C$45.09, after climbing more than 4 percent to C$45.69, their highest level Maple made its C$50-a-share offer official last June.
"It signals optimism on the part of investors that the deal is going to get done," said Tom Caldwell, chairman of Caldwell Financial, which holds TMX shares. "It's the first movement, the first sound we've heard in a long time of radio silence on this matter."
A range of objections to the original proposal emerged during the provincial hearings. Small broker-dealers are wary of the proposed composition of the new company's board, saying the big banks will have too much influence.
There are also worries about the enlarged company's dominance over Canadian equity trading and pricing models for the clearing and settlement of trades under the new structure. At present, clearing and settlement are done on a cost-recovery basis.
The recognition orders drafted by the OSC are expected to provide more insight on how regulators addressed those issues.
Maple also said it was in discussions with its investors and lenders to extend support agreements beyond an April 30 deadline.
(Additional reporting Euan Rocha in Toronto, Louise Egan in Ottawa and Thomas Polansek in Boca Raton, Florida; Editing by Frank McGurty and Rob Wilson)