Editorial: TMX, LSE kill proposed merger

One day before a key vote by TMX Group shareholders on a controversial takeover proposal by the London Stock Exchange, both companies abruptly ended the $3.6-billion deal, saying that there weren’t enough votes to clear the two-thirds required.

About 70% of the shareholders’ votes were cast by proxy prior to the scheduled meeting on June 30, and only 54% of those were in favour of the takeover, according to media reports.

In the tense lead-up to the vote, more financial industry heavyweights were publicly choosing sides. Investment veteran and corporate governance advocate Stephen Jarislowsky came out in support of Maple Group’s rival, $3.8-billion hostile, cash-and-shares offer, saying the LSE is in decline and that a merger could weaken Canada’s financial community and encourage “an exodus of our financial institutions and our brightest financial talents.”

(The 13 members of the Maple consortium are: Alberta Investment Management, Caisse de dépôt et placement du Québec, Canada Pension Plan Investment Board, CIBC World Markets, Desjardins Financial, Dundee Capital Markets, Fonds de solidarité des travailleurs du Québec, GMP Capital, National Bank Financial, Ontario Teachers Pension Plan, Scotia Capital, TD Securities, and Manufacturers Life Insurance.)

Meanwhile, 11 other industry players – including executives of Caldwell Securities, Raymond James, CI Financial, Fiore Financial, Union Securities and Haywood Securities – issued a public statement favouring the LSE Group’s bid.

“After careful review, it is clear to us that the proposed TMX and LSEG merger protects Canadian regulatory sovereignty, champions Canadian executive management and maintains competition and a level playing field,” reads the open letter. “In contrast, the Maple Consortium has proposed the creation of a national monopoly in which our Canadian exchanges would be owned and managed by many of their most powerful participants, and thus would be burdened by significant conflicts.”

Even if TMX shareholders had given the thumbs-up to the takeover, it would have still needed approvals by Industry Canada, the Ontario Securities Commission and the Autorité des marchés financiers, Quebec’s financial regulatory body.

Both the LSE and Maple bids were sweetened a week prior to the vote, with the LSE adding a $4-per-share special dividend to its mostly share offering (valued at $49 per share including the dividend), and Maple adding $2 per share to its mostly cash bid (to $50 per share), and increasing the proportion of cash on offer to 80%.

Both sides hosted pre-vote conference calls outlining their positions. Maple’s spokesman Luc Bertrand, also the vice-chairman of National Bank, said the regulatory hurdles facing the LSE were “far more serious than the LSE has let on,” and questioned the longer-term value of LSE stock, on which much of the exchange’s offer was based. “What the LSE’s asking, there is no precedent and they’re asking for a fundamental change of policy in how things are structured and conducted in Canada,” Bertrand said.

Meanwhile, on the LSE-TMX conference call, the two exchange’s executives were critical of the amount of debt involved in Maple’s offer (2.9 times debt to EBITDA, compared with the LSE’s 1.4 times debt to EBITDA). TMX CEO Tom Kloet said the offer constitutes a “leveraged recapitalization.” In contrast he pointed to $160 million in synergies in the LSE deal across five different areas, including issuer services and technology services.

In response to a reporter’s question about the patriotic tone of Maple’s overtures, LSEG CEO Xavier Rolet said: “The Maple bid has nothing to do with Canadian ownership. It has everything to do with a small number of very large traders trying to establish control” of infrastructure that should be neutral.   

With the LSE offer now history, TMX says it will focus on other alternatives, including the Maple bid. The latter looks unlikely to stir a competitive domestic bid, as most serious players are already members of Maple, and any foreign suitors would only face the same nationalist obstacles in Canada that stopped the LSE in its tracks.

The Maple offer has its own regulatory hurdles – it will have to earn the approval of Canada’s Competition Bureau.