The Ontario government is emerging as a potential obstacle to the $7-billion-plus deal to merge the Toronto and London stock exchanges and is raising doubts about a transaction that would see Canadian shareholders own a 45-per-cent minority share of the transatlantic venture.
Ontario Finance Minister Dwight Duncan expressed significant concern Wednesday, questioning the deal's billing as a "merger of equals" and saying it's prudent to be wary of the idea that bigger is better given problems that plagued global-scale banks during the financial meltdown.
"About 10 years ago there was a real push to merge [Canadian]banks," Mr. Duncan said. "If we didn't do this we couldn't compete. Thank goodness they didn't merge. Otherwise we may have experienced some of what happened in other markets."
Mr. Duncan is referring to the theory that a de facto federal ban on bank mergers in 1998 helped prevent Canadian banks from heading abroad and acquiring significant exposure to the toxic assets that crippled foreign rivals during the global financial crisis.
The provincial minister suggested the mega-deal looks more like a takeover. "I do believe control will rest with the other side," he said.
Securities regulators in Ontario and Quebec are planning hearings on the matter and Mr. Duncan said he wants to hear what voters think. "There absolutely has to be an opportunity for public involvement."
While final authority for approving the merger rests with Ottawa, both Ontario and Quebec have de facto vetoes. That's because their respective securities regulators must approve any transaction that would give someone control of more than 10 per cent of the TMX Group, which owns and operates the Toronto exchange and the Montreal exchange.
The prospect of an election in Ontario this fall - and a possible federal ballot even earlier - are making the politically tricky job of vetting big foreign takeovers even more complicated. The McGuinty Liberals face voters this October under fixed election rules and Stephen Harper's minority Conservative government could be defeated on its March budget.
Mr. Harper, for his part, refused to tip his hand on how Ottawa would proceed, saying that the deal is a "complex transaction" and his government would follow the law that probes whether foreign takeovers are a net benefit to Canada.
It's a change from last October, when Mr. Harper first publicly played down the significance of a hostile Australian bid for Potash Corp. - only to have his government reject the deal the following month after a backlash led by Saskatchewan Premier Brad Wall.
It's no easy feat to predict how the Harper government will respond on the merger. Since taking office, the federal Conservatives have blocked two significant foreign takeovers, muddying the water for non-Canadian investors trying to anticipate whether the Tories will approve future deals.
Unlike the Potash case, however, the Toronto-London merger is a friendly transaction.
All this has Ontario taking a wait-and-see approach, with McGuinty officials still struggling Wednesday to absorb the deal's implications and gauge reaction from Bay Street, the media and other provinces.
Ontario officials say Mr. Duncan's attention is galvanized by the fact that foreigners will own 55 per cent of the venture.
The agreement would set up a new board for the entity that gives Canadian directors seven of its 15 seats. The deal, however, also spells out how under certain circumstances the venture can reduce the number of Canadian directors after four years.
It's not certain Toronto will have an easy time selling the deal as a win for Canada's financial centre.
The agreement offers carrots to each of the major regions with TMX businesses.
Alberta will be the energy trading hub of the new company, giving it a leg up on a growth business as commodities boom. Alberta and British Columbia will be the centre of management for small and medium-sized stock trading, reflecting their heritage as the home of the TSX Venture Exchange.
Montreal will be the centre for derivatives trading, as it is in the current TMX structure, and given that the London exchange has little in the way of a derivatives business, there is ample possibility for expansion.
Toronto gets management of the global listings business, which involves overseeing the 6,700 companies, many in resources, that would be listed on the combined exchanges. TMX CEO Thomas Kloet says this should feed Toronto's reputation as a mining centre.
Mr. Duncan has good reason to be concerned about the deal, though, an official close to the McGuinty government said. The Toronto exchange is home to 60 per cent of the world's mining companies and supports hundreds and hundreds of ancillary jobs from lawyers to accountants to consultants.
If some of exchange listings were to move to London, many of these jobs would be at risk of vanishing, the official said. "There's a heck of a lot at stake and it's not just where the listings appear," he said.
The last thing the McGuinty Liberals want - with a looming October election - is the spectre of the financial industry under attack, a Bay Street source close to the government said.
The Ontario Premier has frequently boasted about how Canada's banks emerged from the recent economic recession in much better shape than their global peers. As thousands of jobs disappeared in the province's manufacturing heartland, Toronto's financial centre emerged unscathed from the recession.
"If Toronto loses jobs," the source said, "it makes Mr. Duncan vulnerable."
Quebec said it would examine the merger to ensure it is in the province's best economic interests.
"The just-announced proposal to merge the London and Toronto stock exchanges raises important issues for the economies of Quebec and Canada," Quebec's Finance Minister Raymond Bachand said Wednesday.
Top priority will be given to ensuring that the economic spinoffs from the derivatives market - a specialty of the Montreal Exchange, which was taken over by the Toronto exchange's parent several years ago - are protected and even strengthened, he added.
Western Canada's business community, which has grown accustomed to major foreign investment, is largely welcoming the exchange merger.
"I'm all in favour of less borders, less fences, less flags, less passports. We're a world economy, and we have to think that way. And this does a lot to get us there," said Rafi Tahmazian, managing director of Calgary-based Canoe Financial.
Concerns about lucrative financing work migrating to London are overstated, said George Gosbee, a well-known Calgary financier who recently founded a new firm called AltaCorp Capital Inc.
"Companies are still going to list predominantly where their head office is, so that will keep the business in Canada," he said.
Indeed, an ownership shift at exchange level is unlikely to produce much impact at all, Mr. Gosbee believes.
"Any institutional investors in Canada can trade in London right now and any European investors can trade in Canada efficiently now," he said. "At the end of the day, European companies and investors are still going to be looking at the company, as opposed to the exchange it's trading on" when they decide to invest, he said.
B.C. Finance Minister Colin Hansen said the merger will "probably have a positive effect," but he said Ottawa must do a thorough review to ensure it is in Canada's best interests.
"It's an example of how Canada is increasingly a player on the international stage in terms of financial institutions," he said in an interview.
The Toronto exchange is important to B.C. companies both in the venture capital arena and for the mining industry, he noted. "It will certainly not diminish the opportunities for B.C. companies and if anything, it's probably going to open new doors for them."
Still, some worry the deal could move money and power even farther away from the oil patch, something Albertans already resent.
"It is hard not to conclude this is just a dressed-up takeover of the Toronto Stock Exchange by the London Stock Exchange," one senior oil and gas banker said. "The oil and gas community already feels there's already too much financial concentration in Toronto, relative to serving the oil and gas community in Calgary. For the financial decision makers and concentration to move even further away, being London, can't be helpful."
He expects TMX and LSE to "spin" the deal to Canada's resource executives by arguing it will give them greater access to European markets. But that, the banker argues, is not a major problem. "I think it will generally be viewed with skepticism in Calgary.
"They are going to say: "I going to have to fly to London to get my deals done? Going to Toronto is bad enough.'"
With reports from Boyd Erman and Janet McFarland in Toronto, Bertrand Marotte in Montreal, Rhéal Séguin in Quebec City, Josh Wingrove in Edmonton, Nathan VanderKlippe in Calgary and Justine Hunter in Victoria.