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Watchdog sets high bar for Maple's TMX takeover

The fate of the $3.8-billion deal to buy TMX Group Inc. now rests in large part on the answer to one question: What does Melanie Aitken want?

Ms. Aitken, the federal Competition Commissioner, has expressed "serious concerns" about the plan by a consortium of banks and financial institutions, known as Maple Group Acquisition Corp., to buy the parent company of the Toronto Stock Exchange. Some within the group remain hopeful they can find a way to address those problems. But there are also growing fears that her demands may kill the deal by making it uneconomical.

Maple, which includes major banks and investors such as Toronto-Dominion Bank, Canada Pension Plan Investment Board and Manulife Financial Corp., has proposed a complex deal to consolidate some key institutions in the Canadian financial markets. The group wants to buy TMX for about $50 a share, then take over two smaller firms – Alpha Group, a competing stock exchange; and the Canadian Depository for Securities, a securities-clearing house – and fold them into the larger company.

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For months, the Competition Bureau has been investigating the proposed deal, amid fears from some on Bay Street that the plan will hurt competition and raise costs for investors. Multiple sources close to the deal say they always expected that concessions would be required to satisfy the bureau.

But if those remedies diminish the potential financial returns of the takeover, then the deal could fall apart – a concern that has caused TMX shares to trade well below the offer price. They closed down 32 cents to $44.43 on Wednesday despite a huge rally in global stock markets.

Maple got word earlier this week that Ms. Aitken had concerns about the deal, and sources said the consortium was heartened that she made no threat to halt it entirely.

There is no telling just how deep the concessions will have to be. The consortium has only been briefed on high-level concerns, and the bureau has conveyed few specifics to date, sources said.

It's clear that the bureau is looking into both the Alpha and CDS purchases. Ms. Aitken has voiced concerns "about the likely competitive effects of the proposed transactions in the current environment, primarily in connection with equities trading and clearing and settlement services in Canada," according to a statement from Maple Group.

With Alpha under its wing, TMX would account for about 80 per cent of Canadian equities trading, and CDS currently has a monopoly on clearing and settlement, a crucial component of Canada's capital markets. More importantly, CDS operates under a cost-recovery model that has sent fees falling to about 1 cent per trade.

Maple has refused to guarantee that fees would stay this low, instead only committing to fees that would be "fair and reasonable."

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Of these two issues, sources say CDS appears easier to resolve because the main point of contention is obvious: taking a not-for-profit entity and turning it into a for-profit monopoly. Investors could be protected from that by pricing commitments, or a pricing system that gives Maple a set return on investment.

Similar restrictions were instituted after a group of Canadian banks teamed up to create Interac, allowing their customers to withdraw cash at one another's bank machines. In the early nineties, the Competition Bureau accused Interac and nine of the financial institutions behind it of abusing their power in the payments sector. To settle the issue, Interac later signed a deal with the Competition Tribunal in 1996 that said it can only charge fees that amount to covering its costs.

But the plan to buy Alpha – the No. 2 Canadian exchange – and merge it with the Toronto Stock Exchange is thornier. Maple has long argued that this shouldn't be a competition issue, because many other alternative trading markets exist, and there are few barriers to entry for launching new trading venues.

Ms. Aitken, it seems, is not buying that argument so far. But sources say her specific concerns aren't known, and that makes it hard for Maple to suggest remedies.

"You knew this was going to be challenging from the get-go – it's the largest financial institutions trying to buy a key piece of financial infrastructure," said Jeff Fenwick, an analyst at Cormark Securities who covers TMX. "It is likely to drag on for several more months."

Even if the Competition Bureau gives its blessing, Maple must get approval from four different provincial securities regulators. Quebec held public hearings last week. Ontario's are set to start Thursday.

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Should Maple's bid fail, it would be the second time this year TMX has seen a deal falter. In February, it struck an agreement to merge with London Stock Exchange Group, but that transaction was shut down by TMX shareholders in June. Although a majority of them backed the deal, a supermajority was needed for such a major transaction.

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