Does GMP Capital support the TMX Group Inc. plan to combine with the London Stock Exchange Group? Depends who you ask at the brokerage.
Harris Fricker, the chief executive of GMP's parent company, GMP Capital , is cool on the idea. He has vocally argued that TMX should be "diner, not dinner." But analyst Stephen Boland disagrees, pointing out in a report Monday on TMX that there's not much out there for a small company like TMX to dine on, and that "beyond the pure protectionist argument we have heard no reason why this deal should not be approved." (That's a brave take, given the boss's stance.)
The issue for TMX, Mr. Boland points out, is that it may be on a "tipping point." Yes, the company is doing well amid a hot bull market for commodity companies that list on its markets, but focusing on that is "short sighted," he argues, because the cycle can easily turn. Also, TMX is facing growing competition and while the business is in solid shape for a couple of years, Mr. Boland says it's hard to be as confident out past that time frame.
"We believe the revenue may be under threat and while this may not alarm those evaluationg this deal, the viability of a company with flat to declining revenues is not a sustainable entity," especially as other exchange companies around the world get bigger and have more resources to support the costly electronics needed to run markets, he said.
"While outlook remains solid for the next two years, competition is expected to increase in more business lines," he said. "In our opinon, the TMX will need to complete this merger with the LSE or quickly be out in the marketplace lookin gfor a more suitable acquisitiosn where TMX controls the board if that is the major concern."
The problem is that the list of companies that TMX can outright buy in its industry is shrinking. TMX's market cap is much smaller than companies like ASX Ltd., the Australian exchange operator, and NASDAQ Group Inc.
For all that, Mr. Boland still recommends buying TMX stock at current prices. If the LSE deal closes, there will be an advance because TMX is trading below the offer price.
And if the deal is denied, there is still two years of TMX doing well and searching for other deals. Mr. Boland raised his price target on TMX to $42.50 from $41, and rates it a "buy."