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Maple Group Acquisition Corp.'s bid to take over the parent company of the Toronto Stock Exchange hit a snag, as a major advisory firm told shareholders they should reject the offer because it contains too much debt and regulatory risk.

Institutional Shareholder Services (ISS) instead threw its support behind TMX Group Inc. 's proposed merger with London Stock Exchange Group Plc. The recommendation is important because ISS recommendations influence the votes of a number of institutional investors - though on it own, it will not likely be enough to tilt to balance in the LSE's favour.

Maple, a consortium that includes major pensions funds, insurers and four of Canada's largest banks, has been battling for weeks to win over TMX shareholders, who are to vote on the LSE deal next week. Maple's offer, which the company says is worth $50 a share, includes $40 a share in cash. LSE's offer is mostly in shares but includes a $4-per-share special dividend.

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But much of the cash to finance the Maple offer would be borrowed, using TMX's balance sheet, a fact that both ISS and Glass Lewis, a smaller advisory firm, identified as a drawback. The two also found common ground on the risks that Maple's proposal would not get past the Competition Bureau. Because ISS believes the barriers to getting this approval are higher than those that TSX-LSE must cross, it suggests shareholders support the LSE deal because it is a "bird in hand."

Neither advisory firm is blown away by one vision over the other. Instead, each appears to be suggesting that shareholders vote for the deal that is most likely to be completed so they get some sort of premium for their stock. If both deals fail, TMX shares would fall.

"Given that the Canadian-bound strategic vision driving the Maple Group offer is no more compelling than that of the broader LSE transaction, yet the high leverage alone carries significantly more structural and (in potentially limiting future growth strategies) strategic risk, there is little incentive for shareholders to take that alternate course," ISS said in its report.

Glass-Lewis echoed that sentiment in its report last week. While there are uncertainties in LSE's plan, it said, "we see more unknowns in Maple's proposal and believe the LSE-TMX merger has a greater probability of obtaining ... necessary approvals."

Both firms point out that under Maple's bid, debt would equate to at least 3.0 times earnings before interest, taxes, depreciation and amortization over the last twelve months, versus the current multiple of 1.1 times. That value would climb even higher after a Maple-controlled TMX buys rival trading Alpha Group and stock clearinghouse CDS, but how much higher is unknown because Maple hasn't put an official value on them just yet.

The uncertainty is troublesome because it means Maple would have to use more earnings to pay down the added debt. TMX would also trigger a debt covenant at 3.5 times EBITDA, and must stay below the regulatory maximum of 4.0 times.

Nor is it clear how easy it would be to integrate CDS into the enlarged company that Maple envisions, or how big the synergies from doing so would be. Under the Maple deal, TMX shareholders would get some stock of the newly constituted company, and at this point no one knows how much it would be worth.

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"We believe the analysis investors will do for themselves will be more sophisticated than what ISS has provided and will lead them to a very different conclusion as to which transaction best serves their interests," Maple Group's Luc Bertrand said in a statement in response to ISS's report.

Securing support from both advisory firms can be expected to bolster TMX's chances of winning shareholder approval for its LSE merger because large mutual fund companies and pension plans typically pay a lot of attention to the recommendations. ISS's report came out exactly one week before TMX holds a shareholder vote meeting on June 30.

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