TMX Broadcast Centre manager Kris Backus pauses in front of the centre's display board in Toronto on Monday May 16, 2011.Frank Gunn/The Canadian Press
Ask Luc Bertrand what the Maple Group consortium will have to pay to fulfill its vision of an integrated, Canadian-owned exchange company, and he'll tell you that he can't tell you.
You'll just have to do the math, is the stock answer from Mr. Bertrand, the man who has become the public face of the nine-member Maple Group since it rolled out a hostile takeover bid for TMX Group Inc. that it values at $48 a share.
That $48 a share is open to debate. There's $33.52 a share in cash, but the rest is in shares. The value of those shares rests on a series of transactions that would follow a successful bid for TMX - namely, combining it with Alpha Group to get a lock on most Canadian stock trading, and adding in CDS Inc., a clearinghouse, to create a virtual monopoly in that business.
But you can't know the real value of Maple Group's bid without knowing the price it will have to pay for Alpha and CDS.
London Stock Exchange PLC head Xavier Rolet, who also wants to combine with TMX, will happily give you a number. Mr. Rolet suggested last week that it could cost Maple $1-billion apiece to acquire Alpha and CDS, saying in an interview that "we think Alpha is close to $1-billion and the clearinghouse is probably worth even more."
That number is suspect because Mr. Rolet is trying to introduce uncertainty into the minds of TMX shareholders who might be tempted by the Maple bid, in hopes of swaying them to support his plan to merge with TMX.
So where's the truth? We will have to take Mr. Bertrand at his suggestion, and do the math. The answer isn't definite, but it's clear enough that the price tag isn't going to be close to $2-billion.
While people involved with Alpha are flattered by the notion that the trading system, started by the big banks in 2007, is worth $1-billion, the numbers don't back it up. Transactions involving comparable companies of late suggest Alpha is probably worth something closer to $150-million.
Alpha's trading business is roughly 30 per cent the size of TMX Group's, based on public volume figures. TMX produces about $120-million a year in stock and bond trading revenue. TMX no longer breaks down how much of that comes from stocks, but historically it's been about 85 per cent, so call it $100-million of equity trading fee revenue.
That would suggest Alpha brings in $30-million a year in revenue. Based on TMX's price-to-sales ratio, that suggests a valuation of around $160-million for Alpha.
Looking at other comparables, BATS Global Markets Inc. is paying the equivalent of $356-million for a trading platform called Chi-X Europe. Chi-X traded 45.5 billion shares in the first quarter. Alpha did 16 billion shares. That points to a valuation in the $125-million range for Alpha.
Who is worth $1-billion? BATS Global. The firm is buying Chi-X Europe and already operates the third-largest U.S. stock market. BATS Global values its own business at about $1.1-billion (U.S.), given the numbers in its recent IPO filing. But it has 10 per cent of the much larger U.S. market, as well as a significant presence in Europe.
What about CDS? It's a crucial piece of the country's financial infrastructure, but it's hard to figure how it would be worth $1-billion (Canadian).
LCH.Clearnet Group, a London-based clearinghouse, has been receiving takeover bids of late in the range of €350-million to €1-billion, equivalent to $488-million to $1.4-billion, according to press reports.
LCH.Clearnet's revenue works out to about $780-million (Canadian), roughly 10 times that of CDS. There's no point comparing profits. CDS is run by its owners, mainly the banks and TMX, as a non-profit. So that suggests that, crudely, CDS is worth something in the $78-million to $140-million range.
Of course, were the clearinghouse actively shopped, there would be interest. TMX would like to buy it, and sources say the main U.S. clearinghouse, DTCC, has also inquired. But even factoring that in, as well as a scarcity premium, it's still a long way from $1-billion.