Mixed reaction as banks, pension funds put in $3.6 billion bid for TMX Group

Maple Group Acquisition Corp.— made up of four big banks and five pension funds — said it submitted a $3.6 billion bid for TMX Group (TSX:X) over the weekend that would see the stock markets operator stay in Canadian hands and have a broad ownership base.

Maple Group also plans to merge the TMX with bank-owned alternative trading company Alpha and CDS Inc., a clearing and depository firm, to create a bigger Canadian-based exchange.

Maple Group said it would seek Competition Bureau approval for such a merger, but its bid is not conditional on that. It added that its $48 a share cash and stock swap bid will allow the TMX Group to achieve the scale and efficiency it needs to succeed in an increasingly competitive marketplace.

Maple said its plan would allow the owner of the Toronto Stock Exchange, Montreal Exchange and junior Venture Exchange to continue financing global resource companies as well as Canada’s venture, energy and derivatives markets.

Simultaneously, Maple said its bid will preserve Canadian governance, decision-making and regulatory oversight of Canadian exchanges while allowing TMX to pursue strategic opportunities internationally.

Maple’s bid comes as the TMX Group is in the midst of an attempted merger with the London Stock Exchange which would create a $6-billion entity and form the world’s eighth-biggest securities market.

The TMX and LSE argue their combination will create a global player, including the leading market for mining stocks, with the size necessary to compete.

The stock exchange industry has been undergoing years of consolidation, resulting in the fewer independent regional markets and more large, diverse organizations capable of addressing the global economy.

On Monday, the companies that own the Nasadaq stock market and InterContinental Exchange withdrew their attempt to buy NYSE Euronext — which owns the New York Stock Exchange.

That removes an obstacle to NYSE Euronext’s previous $10 billion deal to combine with the German exchange operator Deutsche Boerse.

The TMX-LSE proposal has met with some opposition, including from some of Canada’s big banks.

Maple’s investors include: CIBC World Markets Inc., National Bank Financial Inc., Scotia Capital Inc., TD Securities Inc., Alberta Investment Management Corporation, Caisse de depot et placement du Quebec, Fonds de solidarite des travailleurs du Quebec and Ontario Teachers’ Pension Plan Board.

The group does not include Canada’s biggest bank, the Royal Bank, or Bank of Montreal. Both banks are advisers to TMX and the London Stock Exchange on their friendly merger.

Despite its nationalistic tone the Maple bid is already drawing skepticism from some quarters.

Leading TMX shareholder, Thomas Caldwell, likened the bank-led buyout to a step backward for Canada, to a time when the stock exchange was originally a cartel of the country’s major financial institutions.

“I know it looks like ‘Oh we’re preserving it for Canada’ and there will be lots of rhetoric in that regard. But what we’re preserving is something that really is regressive in terms of ownership, even governance, when in actual fact we could participate in something larger,” Caldwell told The Canadian Press.

The chairman and CEO of Caldwell Securities Ltd. said while the Maple bid would mean a better price for his clients, he didn’t think it was a “right thing” for Canada.

While merging the TMX with Alpha and the CDS makes sense, Caldwell said he was perturbed about the stock exchange having owners that would be more concerned with reducing their trading costs than making profits.

“I think long-term, it will hamper the Canadian capital markets,” he said. “I think the investing public prefers a neutral exchange… as opposed to a cartel. It’s a highly conflicted environment where you have your biggest traders controlling the trading environment.”

The TMX Group has said its board will evaluate the proposal, but it will continue to seek regulatory and shareholder approvals required to complete its merger with the London exchange, a deal announced in February.

At least one analyst said TMX appeared to be shrugging off the attention it’s receiving from Maple.

“They just see this as a fly in the ointment,” said John Stephenson, portfolio manager from First Asset Funds, who believes the stock exchange merger will ultimately go through.

“This will be a protracted battle, they’ll wring some concessions out of LSE to get it done,” he said. “You’ll be hearing about exchanges linking up for decades, that’s just the way of the world. The small, regional exchanges’ days are numbered.”

If the Maple Group deal succeeds however, existing shareholders of TMX Group would own 40% of Maple’s shares, the pension fund investors would hold 35% and the bank-owned investment dealers about 25%. Moreover, no shareholder of Maple would own more than 10% of Maple’s total shares, consistent with existing regulations.

“We believe there is an opportunity to create significant value by capitalizing on TMX’s strengths to build a stronger integrated exchange and clearing group — and by doing so, to secure the future growth and ongoing integrity of the Canadian capital markets,” Luc Bertrand, vice-chairman of National Bank Financial, said in a release.

“We believe our offer constitutes a superior proposal under which shareholders would receive cash, plus the opportunity to continue to participate in the company’s ongoing growth.”

Observers who favour the Maple bid, say it would hopefully mean fewer jobs migrating across the Atlantic and fewer concerns of foreign dominance.

“You’re seeing a very confident financial system in Canada is making a bid to buy the TSX, merge it with their own exchange Alpha and look for international opportunities,” said John O’Connell, CEO of Davis-Rea investment management, who added that the Maple group could choose to partner with exchanges in emerging markets like those in India or Hong Kong in the future.

In response to concerns over certain big banks having too much control in the deal, O’Connell said the institutions already held considerable sway in Canada’s financial markets.

“I don’t see it making a material difference of the Canadian landscape,” he said, adding that Canadians would continue to have the ability to trade on the New York Stock Exchange.

Ontario Finance Minister Dwight Duncan, who was concerned a merger with the LSE would leave Canada’s biggest stock exchange dominated by foreign interests, welcomed the new bid.

“I applaud them, I think they’re also Canadian patriots,” he said in a phone interview Saturday. “I think they recognize how important our financial services is to a brighter future for Canada.”

Federal finance minister Jim Flaherty has been briefed on the proposal but did not provide any comment when asked.

Meanwhile, there are those who want to wait for more details before supporting either bid.

“I know the banks are really looking to maintain control of the exchange but they’re going to have a lot of work to do in terms of showing they can provide as much value to shareholders as the LSE bid can,” said Alison Crosthwait, director of global trading research at institutional broker Instinet.

“I worry that with the banks controlling them that they will not evolve as quickly and with as much innovation as you might see if they had to compete globally by merging with the LSE.”

Crosthwait added that she hoped the Maple group would reveal more details about who new management would answer to and what their goals would be.

Maple Group has said a compelling part of its plan is the proposed combination of TMX Group with Alpha Group and CDS to create an integrated trading and clearing exchange for equities, bonds, energy products and derivatives in both exchange-traded and over-the-counter markets.

The bidder said “this proven and highly-valued business model, which currently exists at Deutsche Bvrse, Hong Kong Exchanges and Clearing and the Australian Securities Exchange, would dramatically broaden TMX Group’s business activities, generate substantial growth opportunities, and create significant synergies (including cost rationalization) all for the benefit of TMX Group, its shareholders and Canada’s standing as a global financial centre of excellence.”

Alpha Group was set up in 2007 by BMO Nesbitt Burns, Canaccord Capital, CIBC World Markets, the CPP Investment Board, Desjardins Securities, National Bank Financial, RBC Dominion Securities, Scotia Capital and TD Securities.

CDS , the Canadian clearing and depository firm, is two thirds owned by BMO, ScotiaBank, TD Bank, National Bank, CIBC, and RBC, the Investment Industry Regulatory Organization of Canada, with just over 15%, and TMX Group with about 18%.