With a hostile bid for the owner of the Toronto Stock Exchange hanging in the balance, competition regulators have descended on Bay Street, grilling executives and demanding reams of data to determine whether the deal should be allowed to go ahead.
The bureau is sending teams of six or more people to meet with brokerage executives and market users for up to three hours at a time to analyze the implications of the bid for TMX Group Inc. by Maple Group Acquisition Corp., a consortium of 13 Canadian financial institutions. Competition Bureau staff are peppering interview subjects with questions on everything from pricing models to the intricacies of the clearing system that handles the payments between buyers and sellers of stocks, say people familiar with the discussions.
The bureau is also working with TMX and Maple, demanding regular meetings and detailed data. One request is for all the equity trades consummated on the TMX-owned Toronto Stock Exchange going back a number of years – a number that runs into the hundreds of millions of transactions.
The depth and detail of the Competition Bureau's inquiry highlights the biggest hurdle facing Maple's bid for TMX. Uncertainty about whether the transaction can get past regulators is a major reason that TMX shares are trading around $41, well below the offer price of $50. In addition to Competition Bureau approval, the transaction requires a go-ahead from Canada's main provincial securities regulators.
Maple's members include four of Canada's Big Six banks, a handful of independent brokerages, and four of the country's largest pension funds. Maple's members are at the same time some of the biggest users of TMX's trading services, and the biggest competitors with TMX – some of the largest Maple members, such as Toronto-Dominion Bank, are also significant shareholders in the country's second-largest stock market company, Alpha Group.
The Competition Bureau could block the deal, or it could demand concessions from Maple. Even that could be enough to derail the transaction if the remedies are too costly.
The large gap between the stock price and the takeover bid price leaves the Maple Group offer looking increasingly expensive, and at least a couple of the consortium's members now sound somewhat less enthusiastic about the bid. That's especially true since one of the reasons for launching Maple was to stop an attempt to combine TMX with the London Stock Exchange Group PLC, a transaction that is now off the table after London walked away.
The timeline is also very long. The competition analysis is expected to drag on for months, and Maple has yet to even apply for approval from securities regulators. That process, if history is any guide, is likely to involve a public comment period and public hearings.
"This is a transaction that requires four regulators at the provincial level and a federal commission, and the market is trying to analyze that risk," TMX Group chief executive officer Tom Kloet said in an interview. However, Mr. Kloet said he sees no indication from Maple, which is now in talks with TMX, that the consortium is not serious about its offer now that LSE is gone.
The competition review is more extensive than many in the past, both because of the complexity of the deal and changes in the law that give the bureau more power. Canada's Competition Act was revamped in 2009 to make the process more similar to U.S. procedures for reviewing mergers.
Because of the complicated nature of the trading business, and the large volume of new information that is compiled every trading day, sources say this review has created an unusually large amount of work to comply with the requests.
People familiar with the Competition Bureau review say that there are a number of issues that the regulator appears to be focused on. One is Maple's plan to combine the Alpha alternative stock trading system, in which many Maple members own stakes, with TMX. Putting TMX and Alpha together would create a company with more than 80 per cent of all stock trading in Canada, which has raised red flags for some observers.
In addition, the bureau is said to be asking a lot of questions about the implications of Maple's Plan B if Maple is unable to go ahead with the combination of TMX and Alpha. The Maple Group plans to have a non-compete agreement among Maple members that would bar them from sending trades to Alpha first, said one person familiar with the process.
Alpha has grown into the country's second largest stock-trading market in large part because some of Canada's biggest bank-owned brokerages, four of whom are Maple members, make a point of sending orders there.