Some of Canada's top business executives are speaking out in favour of the merger of the Toronto and London stock exchanges, arguing that it will help the country's capital markets and should not be blocked for political reasons.
In recent days, The Globe and Mail contacted every company in the S&P/TSX 60 index, along with a number of major institutional investors, private companies and smaller firms, to gauge the level of support for the $7-billion merger. The informal survey suggests there is broad approval for the deal among senior Canadian corporate leaders in a number of sectors - along with a few reservations.
The merger still requires approval at the political level, including the federal and Ontario governments. The latter has voiced the most skepticism so far about the deal's merits, with Ontario Finance Minister Dwight Duncan openly questioning whether the so-called "merger of equals" is truly equal and in the best interests of the province. Under the proposed structure, the CEO of the merged company will be based in London, and shareholders in LSE parent London Stock Exchange PLC will own 55 per cent of the merged company.
But reaction from CEOs and chief financial officers suggests that executives at many of Canada's largest public companies do not want politicians to step in. Corporate leaders are optimistic that a merger will benefit both traders, and firms seeking capital. Many executives added that it would be pointless to fight against the forces that are spurring consolidation in the exchange business globally.
The mood stands in contrast to the one that prevailed during last fall's debate over BHP Billiton Ltd.'s takeover attempt of Potash Corp. of Saskatchewan Inc. Back then, a number of top business leaders privately expressed serious doubts about whether the hostile deal would benefit Canada. The Harper government eventually concluded that it would not and turned down BHP.
But the executives also make it clear that the TMX Group and LSE will have to do a much better job selling their deal. While most executives who responded to The Globe were in favour of the merger, they want more details about what it will mean for public companies, traders, and the regulation of Canada's stock markets.
A significant number of respondents remain neutral, while a smaller proportion are outright skeptical about the merger's benefits and most declined to express any opinion at all. But none of those who responded said that government should stop the deal.
"It should have no impact on our capital markets and the government shouldn't get involved," said Vince Galifi, chief financial officer of Magna International Inc.
When citing potential benefits of the deal, more-efficient trading and access to capital were at the top of executives' lists.
"From an investor perspective, it's a great thing … I think it's very hard to deny that there is going to be a net benefit in terms of trading efficiency," said Leo de Bever, chief executive officer of Alberta Investment Management Corp. (AIMco), the province's investment manager.
But Mr. de Bever and others also expressed fears about the deal's unknowns. His main worry is ensuring that Canada's market regulation is adequate.
"How do you maintain national regulatory standards when it's not clear where this thing's sitting?" he said. "Is it in London or is it in Canada - whose rules prevail? In Canada we couldn't even get one national regulator organized, and now you're talking about international regulation."
That cautious stance is what the two exchanges will be working to overcome in the months ahead. TMX Group Inc., which is the parent company of the Toronto exchange, and LSE will have to persuade opinion leaders, politicians and regulators that they can demonstrate exactly how the transaction will benefit small companies seeking access to capital, large inter-listed firms, traders, investors and the cities in which offices will be based.
When it comes to the Ontario legislature, the exchanges are facing an uphill battle. TMX Group CEO Thomas Kloet and LSE head Xavier Rolet met with Mr. Duncan last week, but failed in their attempt to convince him of the merits of the deal.
While Mr. Duncan remains unsupportive, he said this week that he will defer to Ottawa's decision, for now. Federal Industry Minister Tony Clement told reporters in Toronto Friday that the government will "review the proposed transaction backwards and forwards. We will do that in particular with Ontario and Quebec, because they have a regulatory role with respect to this transaction. We're in the information compiling stage right now."
Ontario's top politicians have already reached out to bank CEOs to solicit thoughts on the deal. Similarly, federal Finance Minister Jim Flaherty has been asking bank CEOs for their opinions during previously scheduled pre-budget meetings that have taken place over the last two weeks.
Some of the bank CEOs are very supportive. "If Toronto is going to grow as a global financial centre, the benefits of a global exchange co-headquartered in Toronto likely outweigh the implications of a local exchange that will become increasingly less relevant over time as trading and exchanges globalize," Gordon Nixon, CEO of Royal Bank of Canada, told The Globe.
Mr. Nixon noted that he has a conflict of interest, both because RBC Dominion Securities is advising LSE on the deal and because Royal Bank of Canada is one of the firms that owns the Alpha Group, an alternative trading system set up in 2007 that is the TSX's biggest Canadian rival. (Other part owners of Alpha include the rest of the country's largest banks as well as Canaccord Financial Inc. and the Canada Pension Plan Investment Board.).
But The Globe's survey shows that the exchanges would be wise to disclose more, and do a better job of explaining it, as they fight for their deal to go through.
Sean Boyd, CEO of Agnico-Eagle Mines Ltd., said he is frustrated by the lack of information. "They haven't really articulated what it's going to mean for us," he said. "The big market cap companies, you think they'd be calling [them]and saying 'This is how it's going to unfold.' I don't think we know."
Despite the lack of details, Mr. Boyd said Ottawa should not intervene. "This is happening worldwide," he said. "We have to look at making alliances to increase exposure for Canadian companies into wider pools of investment dollars."
Mining executives expressed some fear that Toronto's mining finance community could be overshadowed by London following the merger, because that city is a more compelling place to live. But they still said that Ottawa should not intervene, because the TSX could become marginalized if the deal doesn't go through and, following on the heels of the government's rejection of the Potash Corp. deal, it would signal that Canada is closed to foreign investment.
A number of executives across various sectors said it would be difficult for them to argue that Canada should block any deal, given that they are expanding into other countries themselves.
"We at Canaccord believe that Canada should be open to foreign investment," said Canaccord chief executive officer Paul Reynolds.
And quite a few business leaders took the argument a step further, saying flat out that Ottawa has no business weighing into this deal. "If the Canadian government subscribes to and practises free trade and open market economics, it should leave it alone," said Ed Miu, chief financial officer of Eldorado Gold Corp.
"Who cares?" said Bill Holland, chief executive officer of CI Financial Corp., adding that exchanges are now "nothing more than a bunch of servers and a name.
"The bigger the better," he said. "All you're trying to do is get the most liquidity at the best prices. Is it something that is vital to Canadian interests? Not at all. It's a non-issue."
VOICES ON THE TORONTO-LONDON STOCK EXCHANGE MERGER
Pat Daniel, CEO of Enbridge (#23 in the TSX 60 index)
"I am a very big believer in Canada entering and participating in global markets, whether it be through our Gateway pipeline project in the energy industry becoming more global, to the way in which we trade our shares. To the extent that it makes it easier for Canadian companies to list on the LSE, and therefore attract more foreign capital to Canadian companies, we would view it as positive."
Denis Jasmin, vice-president of investor relations at SNC-Lavalin (#45 in the TSX 60 index)
"It will attract more interest from foreign investors and analysts to Canadian companies, more exposure. I believe it will also improve TSX services, technology and products."
John Dielwart, CEO of ARC Resources Ltd. (#51 in the TSX 60 index)
"I don't see any real downside to the merger. Technology is key to that business moving forward, so it seems to me a larger, more global enterprise will have better resources to stay ahead of the curve in that area."
"[I]don't really expect the merger to have any real affect on business. [It] may facilitate increased investment from Europe but certainly not material. [The]government should not intervene. [It is]neutral to Canada."
With files from Greg Keenan, Grant Robertson and Boyd Erman in Toronto, Brenda Bouw and David Ebner in Vancouver, Carrie Tait in Calgary and Bertrand Marotte in Montreal