TMX Group Inc., operator of the Toronto Stock Exchange and the target of a $3.8-billion proposed takeover, reported a steeper-than-expected drop in quarterly profit on Friday as a rocky global economic recovery held back equity trading and financing revenue.
Overall revenue fell 7 per cent on weakness in cash markets trading and issuer services such as fees for new listings. The decline might have been worse if not for stronger performances in derivatives trading and other business lines.
In addition to the TSX, the company owns the TSX Venture Exchange for small-capitalization stocks and the Montreal Exchange for derivatives.
“Like the fourth quarter of 2011, the first-quarter 2012 proved to be less profitable for TMX Group because of continuing global economic uncertainty,” Chief Executive Tom Kloet said in a conference call with analysts. “Unlike previous economic downturns, this uncertainty has resulted in steep declines in the level of equity trading and financing activities.”
Net income fell 10 per cent to $56.8-million, or 76 cents a share, from $63.1-million, or 84 cents, a year ago.
Three analysts, on average, had expected a profit of 88 cents a share, according to Thomson Reuters I/B/E/S.
Revenue dropped to $162.3-million, compared with an average forecast of C$172.5 million.
Mr. Kloet said TMX’s performance wasn’t unique as “our global exchange peers are experiencing the same phenomena as well as similar effects on financial performance.”
Michael Smedley, chief portfolio manager at Morgan Meighen & Associates, which owns TMX shares, said the results were not surprising. “All the news that is emerging on the quarter is totally realistic given the course of the market, with lower volumes and lower deals,” he said.
The Toronto Stock Exchange’s S&P/TSX composite index recently dropped to a 2012 low on fresh worries about Europe’s debt crisis, while investors are fixating on North American economic data for clues on the pace of recovery.
“What you have is a quarterly report that is no surprise whatsoever from what is nevertheless a high-quality, cash-generating machine considering how the market conditions have been from a business perspective,” Mr. Smedley said.
TMX shares were unchanged at $47.25 on Thursday morning in trading on the Toronto Stock Exchange, slightly below the Maple offering to buy TMX shares at $50 each.
Market observers said listings revenue was a weak area. Revenue from fees for initial listings dropped 53 per cent to $3.9-million, while additional listing fees slid 21 per cent to $25-million.
Asked about the outlook for listings on TMX markets, Mr. Kloet said: “There are a lot of companies that want to go to the market, but they are seeking a little bit more clarity in terms of market direction and exactly where the market is going to go.”
Cash markets revenue retreated 27 per cent to $24.6-million as volumes on the TSX skidded 19 per cent in the quarter, from a year earlier, while volumes on the TSX Venture market slid 43 per cent. Partially offsetting that weakness was a 14 per cent rise in revenue from derivatives markets to $29.9-million.
TMX is awaiting regulatory approval of its proposed takeover by the Maple Group consortium of 13 Canadian banks, insurers and pension fund administrators. It provided few additional details about the process on Friday
“There has been a lot of positive action and progress of late,” Mr. Kloet said. “We are continuing to work very hard with our partners at Maple to secure the necessary approvals and successfully compete complete this transaction.”
The Maple Group unveiled its offer last year and recently extended the bid deadline to May 31, and the parties have an agreement to try to complete the deal by July 31.
Canada’s Competition Bureau said this week it was studying the Ontario Securities Commission’s draft terms and conditions for approving the bid for TMX.
The bureau, an independent federal agency, said the OSC’s draft rules might mitigate its competition concerns on the Maple bid and it would now seek industry reaction to the OSC terms.
TMX said its latest quarterly profit reflected $500,000 in costs related to the Maple deal on a pretax basis. Higher compensation and benefits expenses also contributed to the profit decline, while operating costs rose 8 per cent to $83.1-million.