TORONTO (Reuters) - TMX Group (X.TO) shares rose on Tuesday after the financial institutions bidding for the Canadian stock exchange operator came a step closer to completing the elusive C$3.8 billion ($3.86 billion) takeover deal.
But the shares held below the bid price on fears that the complicated transaction could still fall apart due to regulatory concerns.
Maple Group, whose 13 members include some of Canada's biggest banks, extended its takeover offer for TMX, operator of the Toronto Stock Exchange and other markets, for a seventh time on Monday. It also said it had reached deals to buy competing stock exchange Alpha Group and the Canadian Depository for Securities Ltd clearing system.
TMX shares rose as much as 3 percent to C$46.44 on Tuesday, but were still below Maple's C$50 a share offer.
The market, however, seems to have taken Maple's moves on Monday as a signal that the deal, first announced last May, is finally taking concrete steps forward.
Agreement among the diverse parties involved in the consortium on prices to be paid for Alpha and CDS, owned by some of the same banks that are in the Maple Group, was seen as evidence that they willing to work together to get the TMX takeover done in a reasonable time frame. Maple has insisted that its takeover of TMX is contingent on it also getting Alpha and CDS.
"It is not surprising that Maple was able to negotiate purchases of Alpha and CDS, which Maple already controlled," Ed Ditmire, an analyst at Macquarie Securities in New York, said in a research note to clients.
"But it is encouraging that they've set prices which seem unlikely to be materially dilutive to the combined entity."
Greg Eckel, senior vice president at TMX shareholder Morgan Meighen & Associates, said he was happy with the investment going forward. "We anticipate there will be some good cash flows, good dividends," he said.
"Of course something can come out of regulators that could throw you off. That will be the wild card."
Critics have argued that the deal would concentrate too much power in the hands of a single player, given that a combination of the TMX exchanges and Alpha will control some 85 percent of Canadian stock trades.
Investors are now waiting for draft rules from the Ontario Securities Commission that will explain the terms and conditions under which the OSC could approve the deal.
These rules could come as early as this week and will be published for a 30-day public comment period.
Maple said late last week that the draft rules might "substantially mitigate" concerns expressed by Canada's Competition Bureau on the impact the new combined company might have on equity trading, clearing and settlement services.
There are seven alternative trading systems operating in Canada in addition to Alpha and the TMX markets. An industry regulator said last week that Goldman Sachs (GS.N) is shuttering its Canadian dark pool less than a year after it was launched.
The Maple deal also needs approvals from regulators in British Columbia and Alberta as well as from the federal Competition Bureau.
In its statement on Monday, Maple said it will pay C$175 million to buy Alpha Group and C$167.5 million to buy the CDS clearing system.
Alpha launched its trading system in November 2008, seeking to inject more competition into the Canadian marketplace by cutting trading fees and improving technology.
Alpha Chief Executive Jos Schmitt said it was not yet clear how the new system would operate.
"I think we need to move step by step and take the various hurdles one by one. I think we made good process," he told Reuters. "We have not yet had the opportunity to discuss among parties how exactly all of that is going to operate."
(This story corrected name of Alpha CEO to Jos Schmitt from Jos Smith)
Reporting By Jennifer Kwan; Editing by Janet Guttsman; and Peter Galloway