Source: The Canadian Press

A transatlantic union between the biggest stock exchanges in Canada and Britain will create a new force in global finance that will change the game for markets around the world, says the head of the Toronto Stock Exchange.

The planned “history-making” merger between TMX Group (TSX:X) and the London Stock Exchange “will redefine the global exchange business,” chief executive Thomas Kloet said Wednesday at a news conference to discuss the proposed deal.

But even as market operators in Canada and Britain announced plans to join hands, it appeared the game was about to change further as officials at stock exchange operators in New York and Germany announced their own merger talks.

NYSE Euronext and Deutsche Boerse AG said there’s no definite deal in place, but the combination could set up a powerful rivalry between two stock market giants, each with a foot on two continents.

The merger activities continue a years-long trend that has seen smaller regional and national securities markets and commodities markets join together in response to the global nature of their industries.

The Anglo-Canadian alliance — which would have 6,700 listings, more than any other exchange –would mean a move toward more flexibility and opportunity for investors on both sides of the pond, Kloet said.

“The opportunity for Canadian companies to tap the world’s largest international pool of capital, the opportunity for our markets to attract new listings in multiple markets, the opportunity to bring new global players as investors into our markets and the opportunity to grow our capital markets internationally.”

The heads of both companies emphasized the deal would be a “merger of equals;” however it would technically see the LSE take over TMX Group, with LSE shareholders owning 55% of the company. The LSE would have eight of its directors on the board to TMX’s seven, and its CEO, Xavier Rolet, would take the helm.

TMX’s Kloet would be president and its Michael Ptasznik would be chief financial officer of the merged company.

But the plan to create a newly combined company worth more than $6 billion has a key hurdle to clear before it becomes reality — it has triggered fresh concern that control of a company vital to Canada’s economic well-being could fall into foreign hands.

Industry Minister Tony Clement said his department will look at the deal to see whether it requires an official review to determine if it’s good for Canada — like the one last year in which Clement stopped the US$38.6-billion takeover of fertilizer company PotashCorp (TSX:POT) by Anglo-American mining giant BHP Billiton.

“This is not a political decision, this is not based on political calculations, it is based on my legislative responsibility under the Act to make a determination,” Clement said.

“And that’s what I will do, that’s what I did in the Potash case that’s what I’ve done in literally dozens of cases before this and I’ll do it again if this is a reviewable transaction.”

The deal must also be approved by the Ontario and Quebec securities regulators, which oversee the Toronto and Montreal exchanges, respectively. Ontario has said it will review the regulatory issues involved, while Quebec said it will also launch a public consultation.

The Quebec government used the deal to reaffirm its opposition to a national securities regulator, saying the potential merger shows the benefit of having a strong local regulator, to defend local interests.

Ontario Finance Minister Dwight Duncan, who supports a national regulator, said Wednesday there are a lot of unanswered questions surrounding the deal.

“is it a merger of equals? It doesn’t appear to be but these are the kinds of questions that need to be asked and need to be explained in much greater detail.”

Meanwhile, Maude Barlow of the Council of Canadians expressed concern that the company would effectively be foreign owned, adding that the deal will likely result in job losses and the relinquishment of Canadian regulatory control as the exchanges become disconnected from any one jurisdiction.

“Any decisions made around standards regulations, where this money goes, how it’s used in the end, it will be much harder for us to have a say in that here in Canada.”

The merger would combine the companies into a new yet-to-be named firm, but each of the 20 exchanges and trading venues operated under the group is slated to remain independent and would continue to be overseen by existing regulators, Kloet said.

Talks between the heads of the Toronto and London exchanges had been going on for five months and Canadian fears that an important resource could fall under foreign ownership were considered during the dealmaking.

“We looked carefully at the benefits we can bring to Canada’s capital markets,” Kloet said.

“With respect to the Investment Canada Act, this is a merger of equals. This is an institution that has combined governance, combined executive management. It has a visionary look to the future in how it helps the Canadian capital markets.”

The Toronto-London merger will be a product “that has a strong net benefit for Canada and I’m very, very pleased with the comprehensive and forward-looking set of undertakings that we’re going to present to the government,” Kloet said.

Among those benefits would be increased exposure for Canada’s hot mining, oil and gas and resource stocks to European investors, Kloet said. And it would also give broader exposure to many of the country’s developing junior companies.

But at least one analyst said the merger shouldn’t be an issue for the government.

The TMX Group isn’t a big revenue or tax generator like PotashCorp, said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier.

“This is not a Potash situation — the Potash situation was more about royalties, revenue for Saskatchewan, basically a big fish in a small pond. Potash meant a lot to the province of Saskatchewan.”

While the merger will give Canadian companies gain access to huge pools of capital in London, the benefits of the merger for Canadian investors shouldn’t be overplayed, said Eric Kirzner, a professor of finance at the University of Toronto.

Canadians already have access to international markets, he said, but the average retail investor doesn’t spend much time analysing and investing in stocks on European exchanges, like LSE Group’s London Stock Exchange and Borsa Italiana.

However, he anticipates the deal is the start of a wave of merger and acquisition activity, which will lead to cost-cutting, efficiencies and enhanced competition among larger exchanges.

“It will create increased competition which ultimately should mean lower listing fees, possibly lower trading costs,” he explained.

The companies are estimating the merger will produce $56 million of “synergies” over the first two years, representing eight per cent of the LSE and TMX current combined cost base. However, it will also create $64 million in one-time costs that will be recorded over a two year-period.

For the LSE, the deal means wider access to North American markets for its clients. It will also give it greater access to derivatives, such as futures trading, markets through the Montreal exchange.

“This is also good business for our European businesses in terms of expanding the reach and the ability to distribute these products into the North American continent — it’s not just about Canada,” said LSE chief executive Xavier Rolet.

Under the planned merger, Toronto will be headquarters for equity listings for the entire group. Montreal will be the hub for derivatives trading, Calgary will be hub for the energy group and Calgary and Vancouver will be headquarters for the junior TSX Venture Exchange.

Shares in the LSE Group closed up three per cent at 920 pence apiece, or C$1.47, while TMX Group shares lost momentum that pushed the stock up as much as 10% earlier in the session and closed six per cent, or $2.57, higher at $42.85 Wednesday.