October 31, 2011 / 4:19 AM / in 6 years

Canada exchange operator backs $3.8 billion buyout bid

<p>A Toronto Stock Exchange (TSX) logo is seen in Toronto November 9, 2007. REUTERS/Mark Blinch</p>

TORONTO (Reuters) - TMX Group has embraced a Canadian consortium’s C$3.8 billion ($3.8 billion) takeover offer, bolstering the chances shareholders will endorse a once-hostile deal that would put the country’s largest exchange under the same roof as its largest rival.

TMX, the operator of the Toronto Stock Exchange, urged investors to vote in favor of the bid from Maple Group, a collective of 13 banks, pension funds and other financial institutions.

TMX’s decision to drop its neutral stance comes four months after the collapse of its effort to combine with the London Stock Exchange. That deal, part of an industry-wide wave of consolidation, raised fears that Canada’s capital markets would fall under foreign control and Toronto would lose its status as a financial center.

But Maple’s proposal, which was initially rejected by TMX, has raised objections of its own because it would put the TSE under the same ownership as Alpha Group, the biggest alternative exchange. The new company would control more than 80 percent of Canadian stock trading, a position that could allow it to raise trading fees for customers.

While it is far from clear whether the federal Competition Bureau will bless the deal, TMX could have put up a formidable roadblock by refusing to embrace its suitors.

“I do not think TMX Group’s support of the deal necessarily makes regulatory approval easier,” said Darryl Levitt a lawyer with Macleod Dixon in Toronto. Even so, “it is much more likely that all relevant information necessary to make a determination in favor of the transaction will be provided,” he said.

The current offer price and deal structure won’t change, the companies said. But Maple has agreed to the appointment of an independent chairman and other concessions related to corporate governance.

“The most substantial factor in the new agreement is Maple’s acceptance to an independent chair, which would have otherwise been investor group leader Luc Bertrand,” said Chris Damas, a TMX shareholder and president of BCMI Research.

TMX shares rose more than 2 percent on Monday to C$43.29 a share. That is still well below Maple’s C$50 offer price, reflecting regulatory uncertainty surrounding the deal.

COMPETITION CONCERNS

TMX Group said it would back Maple as it begins the fraught process of obtaining the necessary approvals, including clearance from the federal Competition Bureau.

Seeking to counter its critics, Maple has said its proposal would bring efficiencies by creating an integrated group offering trading, clearing, settlement and depository services for a broad array of financial instruments.

In addition to the Toronto Stock Exchange, TMX owns the TSX Venture Exchange for small-capitalization stocks, the Montreal Exchange for derivatives and an array of regional exchanges.

TMX Chief Executive Tom Kloet insisted on Monday the deal would not force customers to pay higher trading fees.

“Open and fair access to trading and clearing is a cornerstone of what we are going to build together,” he said on a conference call with media.

“This arrangement is an excellent path forward for Canada’s capital markets to help us both domestically and internationally from a competitive standpoint,” said Kloet, who once championed the LSE deal and strongly opposed Maple’s initial approach.

Earlier this month, Maple submitted applications to regulators in Ontario, Quebec, Alberta, and British Columbia, four provinces where the TMX has operations.

GOVERNANCE ISSUES

Maple, which extended its offer to January 31, has agreed to a reverse break fee of C$39 million if its proposal fails to obtain regulatory approvals.

The battle for TMX began in February with a friendly offer from the operator of the LSE, valued at about $3 billion at the time. LSE eventually withdrew after failing to gain sufficient shareholder support, stalling its drive to gain international heft in a consolidating exchange industry.

“Let me put it this way: I preferred the London deal to the Maple; I (now) prefer the Maple deal probably to no deal on a purely financial basis,” said Thomas Caldwell, an outspoken TMX shareholder who had expressed reservations with the Maple bid.

In addition to the appointment of an independent chairman, Maple agreed that more than half of the 15 members of the proposed board would be independent, consistent with current TMX governance rules. At least four of the current independent TMX board members would join the board of the new company.

The board will also include four nominees from Maple pension fund investors, at least one nominee from Canada’s independent investment dealer community, four nominees from Maple bank-owned participating organizations and the chief executive.

Maple’s members have accepted standstill agreements blocking them from raising their ownership in the exchange operator for five years after the deal’s closing.

($1=0.997 Canadian dollars)

Additional reporting by Pav Jordan in Toronto and Sakthi Prasad in Bangalore; Editing by Frank McGurty

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