Having two buyers battle for your company is usually a blessing for shareholders. For TMX Group Inc. investors, it must feel more like a curse.
TMX shareholders vote June 30 on whether to accept the company's plan to combine with London Stock Exchange Group PLC to create the not-so-imaginatively named LTMX Group.
The vote won't only decide the fate of that transaction, but also the other one on the table. The bank- and pension fund-led consortium that has lobbed in a hostile takeover bid under the transparently nationalist Maple Group banner has also made its offer conditional on TMX shareholders voting down the LSE deal.
With all that at stake, shareholders are voting pretty much blind. Neither bid can proceed without numerous approvals from regulators, but their review processes are just beginning. So shareholders have no real sense whether those approvals will be forthcoming.
The real game, then, is handicapping which deal has a better chance of getting past regulators. Should investors guess wrong, picking deal A over deal B, only to find that regulators later nix deal A, they will be left with a standalone TMX with no suitor. And that means a big drop in the stock.
It's confusing enough that analyst Jeff Fenwick at Cormark Securities on Monday advised investors to simply sell their shares in the market prior to the vote, rather than try to guess the outcome.
"We believe that TMX shareholders face a highly uncertain set of events over the next 6-12 months," he wrote. "As a result, with think investors should opt to take their money off the table."
LSE must convince provincial securities regulators that its plan doesn't hurt Canadian market regulation, or cause a hollowing out of the Canadian financial sector. Then it must convince Industry Canada of the same things, a process complicated by the fact that Industry Canada can be political and unpredictable. Just ask BHP Billiton Ltd.
The big questions from all regulators for LSE and TMX are likely to be about governance, with a focus on why TMX, and by extension Canada, is the smaller player in a deal billed as a merger of equals.
Maple is all-Canadian, with 13 big financial institutions on side, which is its greatest strength and its greatest potential weakness. Maple must pass muster with the securities regulators, and with the Competition Bureau because its plan leads to a diminution of competition in some key markets. For example, Maple plans to merge TMX, the biggest stock market operator in the country, with Alpha Group, a bank-backed trading system that's No. 2.
Will Competition Commissioner Melanie Aitken, who has been aggressive since taking the job, buy into Maple's attempts to cast the competition concerns as minimal?
For example, Maple argues that the focus should be North American, rather than only Canadian, when looking at market share in stock trading. In that context, Maple's proponents point out that less than 50 per cent of the trading in stocks in the benchmark S&P/TSX composite index is on Alpha and the TSX, because a lot of it takes place in the United States.
That's true enough, but it glosses over the point that not even 10 per cent of the listed companies in Canada are in the composite index, and even fewer are cross-listed and available for trading in the U.S. Most of the 4,000 listed companies in Canada can only be traded in Canada. For such securities, the market share together of Alpha and TMX's markets together is closer to 85 per cent.
Maple also argues that trading is the only area with significant overlap. Not exactly.
In market data sales, a big cost for traders and investors, Alpha is probably the second-largest player in the country behind TMX, with a market share that it estimates in the range of 10 to 15 per cent. Again, it's putting No. 1 and No. 2 together. Alpha was also applying to become a new competitor to TMX in listings. Putting the two together would end the chance of that new competition.
The question is whether investors are willing to bet that competition regulators will be alright with that, or will impose conditions that Maple will not find too restrictive.
Cormark may be on to something by advising TMX investors to get out now. After all, the stock is trading almost 20 per cent above where it was before the merger proposals started to arrive.
TMX shareholders can hold on to that small blessing, and avoid the potential curse of guessing wrong on June 30.