A group of banks, insurers and pension funds finally won the blessing of TMX Group for a proposed $3.8-billion takeover, but their deal remains far from a sure thing.
The challenges ahead for the buyers, which are operating under the name Maple Group Acquisition Corp., are formidable. Not only must they convince four different provincial regulators that their takeover is a positive thing, they must also persuade the Competition Bureau to accept a deal will give some of Canada's largest financial institutions more control over the country's capital markets.
Despite the news that Maple’s bid had turned from hostile to friendly, investors sent TMX shares only marginally higher on Monday, closing the day at $43.80, far below the $50 a share that Maple has offered. That suggests the market believes those regulatory fences will be difficult to clear.
Some players in the financial industry have expressed concern during meetings with the Competition Bureau that the deal will lead to reduced competition, and perhaps higher fees, in the trading business. TMX runs the Toronto Stock Exchange; several Maple members are shareholders of Alpha Group, the exchange’s largest competitor. The idea is to merge the two into one entity that would dominate the stock exchange business in Canada.
TMX announced its support for Maple’s bid after months of silence. Initially, the company favoured its own merger with London Stock Exchange Group and battled the Maple bid. But the LSE deal was ultimately shot down by shareholders back in June; TMX obtained majority approval but fell short of the two-thirds super majority that was required.
Investors have since wondered whether TMX’s board would change its position with only one offer left on the table.
“Through this transaction, we further diversify our business, accelerate our growth and improve our position among global players,” TMX chief executive officer Tom Kloet said on a conference call Monday.
He also talked about a new “alignment of interests” with Maple, a reference to a key element of the plan that will see the new owners acquire the Canadian Depository for Securities and merge it into TMX, an idea that Mr. Kloet has long supported. Mr. Kloet said the plan, which would add a new source of revenue for the company, would create “a unique opportunity to provide an integrated group that can provide trading, clearing, settlement and depository services for a broad array of financial instruments.”
Under the new agreement, TMX’s existing senior management would remain in place, and Mr. Kloet will take the helm as Maple’s CEO. TMX’s current board structure, which ensures that at least 25 per cent of its directors are residents of Quebec and at least 25 per cent have expertise in derivatives, would stay.
Maple was first formed in May when nine of Canada's biggest financial institutions, including Canadian Imperial Bank of Commerce, the Canada Pension Plan Investment Board and Ontario Teachers' Pension Plan, came together to hash out a deal to rival TMX's merger with LSE. The group was later expanded to 13 members when firms such as Manulife Financial Corp. and Desjardins Financial joined to diversify the consortium and dilute the banks' ownership of TMX.
TMX initially rejected Maple’s bid, in large part because it will tack on a pile of debt in order to buy back shares and because it was committed to the LSE deal. Mr. Kloet addressed that concern on Monday. Before the two groups opened discussions, “we didn’t have a full view of the form of the debt or the business plan of Maple, or how [Maple]viewed its ability to pay down that debt over time,” he said. There also was no insight into “how that debt would inhibit, or not inhibit, our ability to expand internationally.”
Previously, TMX also worried about getting approval from the federal Competition Bureau, which is still required. At this point, no one knows which way the bureau is leaning, but it has been meeting with many industry players over the past few months to gain an understanding of the relevant issues.
Maple’s bid must also get regulatory approval from four different provinces. Regulators in Quebec and Ontario have already set up public hearings for the last week of November and first week of December, and for that reason Maple has pushed its offer’s expiry date into the new year.
If regulators do not approve the deal, Maple has agreed to pay TMX a $39-million reverse break fee.
Editor's note: An earlier version of this story stated that Maple has modified its deal. Though certain parts of the agreement has been changed, the consortium originally said that it hoped to keep TMX's management in place if its takeover is successful.