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Shareholders reject proposed merger of TMX and LSE

Ontario Finance Minister Dwight Duncan was pleased that politicians wouldn't have to potentially step in and block a cross-border deal.

Peter Power/Peter Power/The Globe and Mail

The proposed merger of Canada's TMX Group Inc. and London Stock Exchange Group PLC has fallen apart amid a lack of shareholder support, opening the door to a competing bid by a group of Canadian financial institutions and taking the pressure off politicians faced with another controversial foreign takeover.

The plan to merge the owner of the Toronto Stock Exchange and the LSE to create a trans-Atlantic stock and derivatives market operator failed when it became clear from early returns that not enough TMX investors would support the deal. TMX and LSE called off the merger plan Wednesday rather than forging ahead with a planned vote scheduled for Thursday.

The end of LSE and TMX's merger plan means that politicians in Ontario, Quebec and Ottawa won't have to weigh in on the possibility of another key Canadian business falling under foreign control, which will be a relief to some. In the wake of the federal government's decision to block the BHP Billiton takeover attempt for Potash Corp. of Saskatchewan last year, even politicians with concerns about the LSE plan were not relishing the idea of stepping in because they feared that another decision to block a cross-border deal would give Canada a reputation as being closed to foreign business.

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"This is the kind of response that I had hoped would come from the private sector," a visibly pleased Ontario Finance Minister Dwight Duncan declared on Wednesday. "We would not have been able to, just because we didn't want to allow it to happen, stop it."

TMX and LSE unveiled their merger plan in February, vying to join a global move to create larger, transnational exchange companies. The same day as they announced their proposal, the owner of the New York Stock Exchange and Germany's main market company also said they wanted to merge. The historic exchanges, fighting competition from upstarts at home, were seeking to combine to find new customers and offer new products.

However, in Canada, that movement ran into a wall. Some of the most powerful financial institutions in the country banded together to fight the LSE-TMX transaction because they were concerned that Canada was the junior partner and that influence and business would trickle away to London.

Led by Toronto-Dominion Bank, National Bank of Canada and Canadian Imperial Bank of Commerce, the opponents first tried to push back with an open letter of protest. When that wasn't enough, they brought on other big players, dubbed themselves Maple Group and launched a counterbid that sapped the TMX-LSE proposal of support by offering both a higher price and a nationalist alternative.

Mr. Duncan, Ontario's finance minister, had made no secret about his concerns that control of Canada's main stock exchange would move to London if the TMX joined forces with an overseas partner. He also called the exchange a "strategic asset," echoing the language of Saskatchewan Premier Brad Wall when he opposed the Potash takeover. Ontario is home to the TMX and 300,000 people who work in finance. Jean Charest, Quebec's premier, had also stated his preference for Maple.

But that opposition raised some criticism from abroad that the Canadian establishment was closing ranks to keep out a foreign entity on a business deal. On Wednesday, the British government's reaction was muted. "We're obviously disappointed that this merger didn't proceed," said Nathan Skolski, a spokesman for the British High Commission in Ottawa. "It was, in the end, a shareholder decision," he said.

Shareholders had a number of factors to consider. One was price - Maple is offering more per TMX share at $50. The vote also became a referendum on whether it was better for Canada's main stock exchange to try going international with LSE, as part of a global trend to exchange mergers, or staying domestic with Maple.

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In the end, TMX said that while a majority of shareholders supported the transaction, the LSE-TMX plan would not get the two-thirds approval it needed. TMX declined to release the vote totals. One person familiar with the transaction said the exchange received the support of about 54 per cent of shareholders who voted early.

The transaction also divided the Canadian financial community. Maple, on one side, had its heavyweight membership, which included institutions such as Toronto-Dominion Bank and the Canada Pension Plan Investment Board. Ed Clark, TD's chief executive and one of the country's most influential executives, was among the key players behind the Maple proposal, along with Richard Nesbitt of the Canadian Imperial Bank of Commerce and Luc Bertrand of National Bank of Canada. Mr. Nesbitt is the former CEO of the TMX, while Mr. Bertrand used to run Montreal's derivatives exchange.

TMX and LSE also had a list of high-profile supporters, including Bill Holland, chairman of CI Financial Corp., the country's biggest independent mutual fund company and a large TMX shareholder.

The reaction to the end of the LSE-TMX plan from some on Bay Street mirrored that split.

"I have mixed feelings," said Nick Thadaney, head of the Canadian arm of brokerage firm Investment Technology Group Inc. "As a Canadian, it's probably a good thing. As a person in the context of global exchanges and trading, I'm not sure yet. It may isolate us a bit more."

Maple is hoping to reach a friendly deal with TMX now that LSE is gone.

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"We genuinely believe Maple's vision represents the best way forward for TMX Group and the Canadian capital markets," said Mr. Bertrand, who has been acting as Maple's chief spokesman.

Maple has two conditions it still needs to meet for its bid to go ahead. The consortium requires 70 per cent of TMX shareholders to agree to sell, and it needs approval from the Competition Bureau. Securities business sources say that the bureau is already reaching out to executives at trading firms to try to understand the implications of the Maple plan.

Maple wants to be able to merge TMX, which owns the biggest stock market operations in Canada, with the No. 2 player, known as Alpha Group. Alpha is owned by many of the players in Maple. Doing so would create a company with close to 85 per cent market share in stock trading. Maple argues that low barriers of entry in stock trading and plenty of capacity in other trading systems that would make it hard even with that market share to raise prices.

Maple also wants regulators to allow it to merge CDS Inc., a system that settles trades between stock and bond investors buying and selling, with TMX Group, which has a similar system for derivatives. Maple says it won't raise prices.

With reports from Paul Waldie in Toronto and John Ibbitson in Ottawa

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