Without a doubt, the Caisse de dépôt et placement du Québec will play a starring role at public hearings in February on a proposed merger between TSX Group Inc. and Montreal Exchange Inc.

Henri-Paul Rousseau, CEO of the caisse, is about the only player in Canada’s capital markets who has expressed doubts about the long-awaited, $1.3-billion merger deal between the two exchange groups.

In announcing the agreement to create TMX Group Inc. , TSX CEO Richard Nesbitt and MX CEO Luc Bertrand said the merger is essential for the future, given the rapidly consolidating exchange industry.

“If you’re going to be competitive, you have to be bigger,” Bertrand said during a conference call he and Nesbitt held to discuss the proposal. “You can’t stand still or believe the status quo is an option when you’re faced with accelerating consolidation all around you.”

Nesbitt says the merger is in line with a trend around the world to meld stock exchanges with derivatives exchanges.

But, Rousseau says, the caisse, Quebec’s giant public pension fund manager, has questions about the benefits of the deal for the MX and called for a public debate on the proposal. The caisse owns almost 8% of the MX stock.

In a frosty news release, Rous-seau has questioned whether the merger is “ultimately viable,” given the stiff competition the TSX is facing from U.S. exchanges for trading in interlisted stocks, as well as from private electronic stock-trading platforms in Canada, including one being set up by the big banks. The MX’s derivatives business, in contrast, is growing rapidly.

QUESTIONS TO BE ANSWERED

The caisse is also concerned about governance issues, Rousseau adds, including the role of Quebec’s representatives on the board and the executive committee. He questions where the decision-making centre will be located.

“It is essential that these questions be answered before we take a definitive stand on the proposal,” he says.

The caisse will have its chance to spark a debate when Quebec’s financial regulator, the Autorité des marchés financiers, holds public hearings on the proposed merger in February. Both the AMF and the Ontario Securities Commission have to approve the transaction, as does the Competition Bureau and the U.S. Securities and Exchange Commission.

TSX Group, the parent company of the Toronto Stock Exchange and the TSX Venture Exchange, is offering 15.3-million TSX shares plus $428 million in cash to purchase the MX’s outstanding shares. The MX will hold a special shareholder meeting to approve the deal on Feb. 13.

Nesbitt and Bertrand appear anxious to make the takeover of the 133-year-old MX look as Quebec-friendly as possible. Although the combined company will be based in Toronto and Nesbitt will become CEO, Bertrand will have the title of deputy CEO and continue to head the derivatives operations in Montreal, including the Montreal Climate Exchange, a carbon trading market, and the Canadian Derivatives Clearing Corp.

Wayne Fox, current chairman of the TSX, will chair an 18-member board of directors that is to include five directors designated by the MX, including Bertrand. And 25% of TMX’s directors will have to be residents of Quebec.

Quebec’s Jean Charest-led Liberal government appears to be in favour of the merger, but has to be wary of the optics of a Toronto-based company buying a Montreal icon. Indeed, the deal quickly came under fire from the Parti Québécois.

Quebec Finance Minister Monique Jérôme-Forget says the merger looks good, but adds she will keep a close eye on the details — because “the devil is in the details. At first glance, this merger proposal responds to the priorities that the government has defended,” she says, including keeping derivatives activity and the carbon exchange in Montreal, as well as maintaining the AMF’s role in regulating the MX.

Analysts and other large shareholders are upbeat on the deal.

“We view this positively,” says John Aiken, an analyst at Dundee Securities Corp. in Toronto, in a note. “Keeping Luc Bertrand on with a key role will be critical in selling the deal to Quebec’s regulators and political machine.”

“INTERESTING” DEAL

Adds Richard Schaeffer, chairman of the New York Mercantile Exchange, in a statement e-mailed to the media: “Our confidence in Luc Bertrand and Richard Nesbitt leads us to strongly support this transaction.” Nymex, owner of 10% of the MX, has signed an agreement with the TSX to vote in favour of the deal.

@page_break@A spokesman for National Bank of Canada, owner of about 8% of the MX stock, told the Montreal Gazette that the deal was “interesting” from both a financial and strategic point of view. National Bank CEO Louis Vachon is on the MX’s board, and National Bank Financial Ltd. is a financial advi-sor to the MX on the transaction.

In addition to Nymex, directors and executives of MX, who hold about 7% of the stock, have agreed to vote in favour of the merger, which requires approval from two-thirds of the shareholders. Bertrand holds about 4.5%.

Before the deal, the TSX and MX had been heading toward head-to-head competition in March 2009, when a non-compete agreement between the two parties was set to expire. The TSX had signed an agreement with the U.S. International Securities Exchange to launch a competing derivatives exchange under the name DEX.

Meanwhile, the MX had signed up with Nymex to launch an energy trading platform in Calgary to compete with a TSX operation there. The two CEOs say they will now have to sit down with their various partners to discuss the future.

Analysts put the chances of a competing bid from abroad as unlikely, given the MX board’s support for the TSX deal and a $46-million break fee the MX would have to pay if the deal doesn’t close.

But with consolidation sweeping the industry, at least one analyst is speculating that the new TMX could itself be quickly swallowed by a giant international exchange complex.

But judging from nationalist reaction in Quebec to the TSX bid, analysts might do well to take it one deal at a time. IE