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Is another run for TMX too tempting for LSE to resist?

Had the merger between the Toronto and London stock exchanges succeeded, what was the name of the new company going to be?


Things are going well for the London Stock Exchange, in spite of its losing pursuit of the TMX Group , owner of the Toronto and Montreal exchanges, in June. LSE shares are up about 12 per cent over a year, defying the general market slump as recession fears intensify by the minute.

It is in exclusive talks to buy LCH.Clearnet, the European clearing house it has coveted pretty much forever, and it reported a 79 per cent increase in pre-tax profits, to £179.7-million ($288.2-million) in the six months to the end of November.

Now, suddenly, the TMX might be up for grabs again. And if the deal made sense in February -- when the Canadian and British companies announced a "merger of equals" -- you can bet TMX boss Thomas Kloet and his LSE counterpart, Xavier Rolet, believe it still does today.

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Late on Tuesday night, Maple Group, the TMX's suitor, announced that Canada's Competition Bureau has "serious concerns" about Maple's proposed purchase of TMX. The bureau's concerns are "primarily in connection with equities trading and clearing settlement in Canada," said Maple, which is offering $3.73-billion for TMX.

Maple, a consortium of Canadian banks and pension funds, and the TMX have know for some time that their deal would make the regulators grumpy. Maple plans to buy Alpha Group, an alternative trading platform that now competes with the TMX, and combine it with the TMX trading system. Together, TMX and Alpha would control a potentially competition-crunching 80 per cent of Canadian stock trading, based on summer market share figures.

Maple would also buy the Canadian Depository for Securities (CDS), which provides clearing and settlement services. It would be merged with the Canadian Derivatives Clearing Corp. (CDCC), which clears derivatives for the Montreal Exchange.

In the autumn, Maple's takeover proposal ran into ferocious resistance from several big names in the financial services industry. In a submission to the Ontario Securities Commission, Chi-X, the operator of an alternative trading platform, said "competition for clearing services in Canada will be unlikely going forward" if Maple gets its way with the TMX. Independent brokerage firms opposed the takeover, for fear that the already powerful banks would utterly dominate trading, clearing and listings as well as pretty much everything to do with Bay Street.

TMX and Maple will work with the regulator to address the concerns, including identifying possible "remedial measures," Maple said in the statement. But the deal may be unfixable.

Enter, or make that re-enter, the LSE?

The LSE killed its effort to merge with the TMX after the TMX failed to gain enough shareholder support for a deal aimed at creating the world's premier resources exchange, one that would allegedly have created compelling value through cost and revenue synergies. The share-swap attempt failed even though the LSE had flung a $4-a-share special dividend onto the table.

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Victoria Brough, the LSE's communications director, declined to comment on the possibility of the LSE renewing its pursuit of the TMX if the Maple offer dies. "We would not speculate," she said.

The LSE, whose shareholders had approved the union with the TMX, still needs a deal beyond LCH.Clearnet. It wants to be a global exchange and it can't get there organically. It has to buy, get bought or merge as the industry consolidates. For the LSE, the TMX was to be the first step, but only the first step, onto the global stage.

The TMX also wants a global growth strategy, but the recent wave of merger and merger attempts is narrowing the list of potential suitors. NYSE Euronext and Deutsche Boerse are awaiting approval for their merger. Tokyo Stock Exchange Group, operator of Japan's largest bourse, last week announced a takeover bid that values Osaka Securities Exchange, for $1.66-billion (U.S.). The Tokyo exchange owns 5 per cent of the Singapore Exchange, which itself is on the hunt for a merger partner.

The LSE, of course, is flat-out busy trying to get the LCH.Clearnet deal done. But could it resist taking another whack at the TMX if it springs free?

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