The TMX Group Inc., owner of the Toronto Stock Exchange (the “TSX”) is facing a quickly changing landscape of take-over and merger options. What emerged from this landscape was a bidding war between two rival options resulting in the parties battling to outbid one another.
Miller Thomson Analysis
The first option was launched by the London Stock Exchange (the “LSE”) in February of 2011 and was billed as a “merger of equals”. It would have resulted in a combined stock exchange entity whose management would have been shared between London and Toronto. This arrangement, headed by the TLMX Group PLC, would have seen LSE shareholders own 55%, and TSX shareholders 45% of the combined stock exchange. The bid received court approval to go to a shareholder vote on June 30, 2011.
On June 29th one day prior to the TMX shareholder vote to approve the LSE bid, the LSE bid was withdrawn. Although the proxies received demonstrated that a majority of shareholders were in favor of the LSE deal, it fell short of the 2/3 majority required for approval, essentially terminating the deal. Although the LSE will receive a $10.3 million termination fee as a result of the failed deal, skeptics are questioning the survival of the LSE. It is widely believed that the failed venture could leave the exchange isolated in the global exchanges consolidation game. The LSE may be exposed to takeover by other cash-rich exchanges such as Singapore or Hong Kong as the decision to remain independent becomes less tenable in the global marketplace.
The second merger option which, at the time of publishing this article is still alive, is a bid that was first launched on May 15, 2011 by Maple Group Acquisition Corp. (“Maple”). In contrast to the LSE bid, Maple is comprised of a consortium of Canadian banks and pension funds that will keep the TSX in Canadian hands; the group was hailed by Ontario's Finance Minister as “Canadian patriots”. The Maple bid is comprised of a cash and stock swap that, at the time of publication of this article, represents a bid of $50 per share. The Maple bid would result in the existing TMX shareholders owning 40% of Maple's shares, the pension funds owning 38%, and the bank-owned investment dealers owning 22%. No one shareholder would own more than 10%. Maple plans to merge the TSX with Alpha, an existing smaller exchange, as well as with Canadian Depository Services (“CDS”) to create a larger entity.
While the LSE bid was still alive, the board of the TMX rejected the Maple offer on the grounds that it was too vague and risky, citing concerns that Maple had not provided sufficient detail on how the combined business would be run, and on the value of the assets that would have been contributed by banks such as the Alpha exchange. There is no assurance under the Maple deal that the transaction to roll in Alpha and CDS would actually be completed, and Maple has not ascribed any value to those assets. Another concern cited by the TMX in rejecting the Maple deal was the fear that competition law issues would eventually work to block the Maple deal. The termination of the LSE bid may cause the TMX board to reconsider.
As a result of the TMX board rejecting the Maple offer, Maple decided to approach TMX shareholders directly, without precluding the possibility of working together with the TMX board in the future, should TMX change its mind.
The hostile Maple offer, which has yet to be formally made to shareholders, is being billed as a “made in Canada” solution, which will act as a vehicle to allow the TSX to pursue international growth and consolidation. In fact, the Maple bid was sold as a way to block the LSE offer and thereby curb fears that the centre of gravity should shift from Toronto to London. Although there is concern that Canadian patriotism will transform into protectionism, the Maple group believes that operating the TMX under the so-called “integrated model” of exchanges, where the totality of a country's trading services are provided by one company, is a popular and profitable method for managing exchanges.
Another interesting motivator that led to the Maple Group's bid, is a fear on the part of banks and large investment funds that the LSE offer would not survive scrutiny by Ottawa. There is worry that if another deal is quashed by Ottawa after the Potash deal was terminated in the political arena in 2010, a negative message will be sent to the world about Canada's openness to investment.
While avoiding the fears of foreign dominance and ownership that had been stoked by the LSE bid, the Maple bid faces certain regulatory and public opinion roadblocks.
There is concern about allowing the banks who advise on and structure securities to own the exchange on which those securities are listed. Additionally, the consolidation of the TSX with Alpha and CDS will be subject to approval by the Competition Bureau since it would essentially create a monopoly on exchanges. A key TSX shareholder has indicated concern about the Maple bid marking a regression to the days when the exchange was owned by the banks. Allegations of trying to create a “cartel” have been made against Maple.
A recent announcement however, may sway public opinion. On June 12th the Maple Group announced four new additions to the consortium of banks and pension funds; Quebec’s Desjardins Group, Manulife Financial Corp., GMP Capital Inc. and Dundee Securities Corp. The significance of the new additions is that the consortium has increased to 13 members, thereby decreasing the influence of the banks from 25% to 22%. Under the new structure, important decisions will require 13 approvals rather than 9. It remains to be seen whether this change to the composition of the Maple Group will satisfy the Competition Bureau.
The failure of the LSE deal puts the TMX in a position to reconsider Maple’s rival offer. Maple has vowed to diligently pursue all necessary regulatory approvals, and to engage in a constructive dialogue with all relevant stakeholders. The failed LSE deal may also result in two additional major banks, the Royal Bank of Canada and Bank of Montreal, who were initially advising on the LSE bid, to join the consortium. The result could be a revised offer from Maple that is more attractive to TMX shareholders. It remains to be seen whether the Maple bid will gain regulatory approval, and garner the necessary support required from TMX shareholders.
In the event that the Maple bid is successful, the TMX will pay a further break-up fee of $29.8 million to the LSE over the 12 month period following the deal.