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Key shareholder adviser backs TMX-LSE deal

The London Stock Exchange


Four years ago, Ontario Teachers' Pension Plan bought a firm called Glass, Lewis & Co. that advises shareholders on proxy votes. Teachers said it wanted to ensure that there was "an impartial, expert source of information" for investors wondering how to vote at shareholder meetings.

On Friday, Teachers ended up at odds with that "impartial, expert source." Glass Lewis came out with a recommendation that shareholders of TMX Group Inc. shun a hostile takeover bid from Ontario Teachers and its partners in the 13-member Maple Group, and instead support a friendly deal between TMX and London Stock Exchange Group PLC. Maple responded by calling Glass Lewis's analysis "deeply flawed" and full of "errors and inaccuracies."

Glass Lewis found that while the proposals from both Maple and LSE had "strategic merit," there is "more risk in Maple's proposal." For example, Glass Lewis said it believes that LSE has a better chance of getting regulatory approval, and the LSE-TMX deal would leave the resulting combination with less debt than the Maple proposal.

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Glass Lewis's recommendation may sway more votes in favour of the LSE transaction on June 30, when TMX shareholders must decide between the two proposals. The LSE plan requires support from owners of two-thirds of TMX shareholders in the June 30 vote. Maple has made its bid conditional on shareholders voting down the LSE plan and is actively trying to rally "no" votes.

Glass, Lewis is the second-biggest player in the business of advising institutional shareholders on how to vote on big decisions. Institutional Shareholder Services Inc., the biggest voting adviser, has yet to weigh in, but is expected to do so early next week.

"We see greater execution risks in the Maple plan compared to the LSE merger," Glass Lewis wrote. "To be sure, we acknowledge that the TMX-LSE has its own uncertainties, which include whether it would gain approval from multiple Canadian regulators. But we see more unknowns in Maple's proposal and believe the LSE-TMX merger has a greater chance of obtaining all necessary approvals."

Glass Lewis said that Maple's valuation of its cash-and-stock offer at $48 per TMX share "isn't quite as good as it seems, in our view" and the all-stock consideration offered by LSE is "higher quality." As a result Glass Lewis said the "financial aspects of the LSE's proposal are fair to shareholders and approximately equal, if not superior, to Maple's offer." At the moment, the all-stock LSE bid is worth $45.11.

LSE and TMX cheered the report, while Maple disputed many of Glass Lewis's points one-by-one in a long rebuttal. Maple, for example, pointed out that Quebec's premier has said he prefers the Maple bid, something it says Glass Lewis "appears not to have been aware of or considered."

Teachers bought Glass Lewis in late 2007 for $46-million (U.S.). Glass Lewis says it operates "as an independent company separate from OTPP. The proxy voting and related corporate governance policies of Glass Lewis are separate from OTPP."

Teachers uses Glass Lewis research as part of the process of deciding how to vote. The pension fund manager has voted in a different way than Glass Lewis has recommended in past, in areas such as say-on-pay resolutions.

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"Glass Lewis is part, but not all of our research," said Teachers spokeswoman Deborah Allan. "We don't always agree with their opinion, as is the case with Maple."

In this case, Teachers won't actually have to vote counter to Glass Lewis, as it owns no TMX stock, according to Maple's bid documents.

Canada Pension Plan Investment Board, another of the Maple members, uses Glass Lewis and ISS Governance Services. CPPIB owns 508,827 shares of TMX, according to the Maple bid documents.

"As we are part of the Maple consortium that is urging shareholders to vote against the LSE proposal, we will be voting against it ourselves," said CPPIB spokeswoman Linda Sims.

TMX spokeswoman Carolyn Quick said the company is "very pleased" with the Glass Lewis recommendation, a sentiment echoed by LSE chief executive officer Xavier Rolet.

"Glass Lewis have carefully evaluated our merger with TMX and it is great news that shareholders now have the advice of a highly regarded independent shareholder advisory firm on which to base their decision to vote for LSE/TMX," Mr. Rolet said.

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