Debt is common fear in TMX adviser reviews

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The major shareholder advisory firms have weighed in on the TMX takeover saga, and both urge voters to support the LSE deal.

Reading that decision in headlines, you get the impression that there's broad support for this deal. But if you read the full reports, you'll find that both firms' arguments aren't extremely compelling.

Rather than adamantly support one bid over the other, the TMX-LSE combination is made out to be the least risky of the two options. The common issue driving that decision is the debt that Maple Group Acquisition Corp. will tack on to buy TMX and then wrap in Alpha Group and the Canadian Depository for Securities.

Both Glass-Lewis and ISS point out that debt under Maple's bid will rise to at least three times earnings before interest, taxes, depreciation and amortization over the last 12 months, against the current multiple of 1.1 times. That multiple could climb even higher after buying Alpha and CDS, but how much higher is unknown because Maple hasn't slapped an official value on them just yet.

More debt is obviously a problem because it means Maple will have to use more earnings to pay it down. It's also an issue because TMX hits a debt covenant at 3.5 times EBITDA, and must also stay below the regulatory maximum of four times.

Aside from that central concern, the two advisory firms harp mostly on regulatory issues, with each of them concluding that at this point there's no way to determine what the provincial regulators and the federal government will do.

Under those terms, they attribute too much risk and too many unknowns to Alpha, and for that reason they say LSE is the safer bet. While there are uncertainties in LSE's plan, "we see more unknowns in Maple's proposal and believe the LSE-TMX merger has a greater probability of obtaining all necessary approvals," Glass-Lewis's report said.

As a shareholder, that isn't the best vote of confidence. Ideally you would hope that one vision is so much more compelling than the other that you absolutely want to get behind it. Instead, it sounds more like voting in an election when you don't like both candidates and you decide to vote for the lesser of two evils.

ISS's review has a similar tone. "Given that the Canadian-bound strategic vision driving the Maple Group offer is no more compelling than that of the broader LSE transaction, yet the high leverage alone carries significantly more structural and (in potentially limiting future growth strategies) strategic risk, there is little incentive for shareholders to take that alternate course."

Because there is so much uncertainty in both options, it would be nice to see a review that takes all of the regulatory issues out of play and judges the two deals on the merits of their strategies alone.