February 22, 2011 / 10:46 PM / in 7 years

TMX chief warns Canada of risk in blocking LSE deal

TORONTO (Reuters) - The head of TMX Group Inc warned that Canada would risk damaging its free-trade credentials if it blocked the Toronto exchange’s proposed merger with the London Stock Exchange, as Canadian political opposition picked up steam.

Ontario, Canada’s most powerful province and home to its financial center in Toronto, said on Tuesday it will launch a review of the planned deal. Politicians have questioned whether it would benefit the province and the country.

Growing resistance has thrown into question whether the deal -- one of three big exchange mergers under scrutiny globally -- will survive what could be a year-long review process.

TMX Chief Executive Thomas Kloet told Reuters in an interview he is taking political opposition to a deal “very seriously.”

Even so, he said Canada was putting its reputation on free trade and competition on the line as it considers a proposal to create a transatlantic operator worth $7 billion in market capitalization and the world’s fifth-largest exchange ranked by trading volume.

“One of the things Canada has to make sure to consider as it goes through this is what if it says no,” Kloet said.

“What does that mean for its capital markets -- are they less competitive? Canada seems to want to seek a free trade agreement with the EU. If it says no to this transaction, does it send the right signal for that?” Kloet said.

“I‘m not qualified to answer some of these questions, but I‘m sure those are some of the questions that will have to be answered.”

Ontario Finance Minister Dwight Duncan, one of the most vocal critics of the proposal, said he opposed any takeover that could potentially lead to Canada losing control over its main capital markets.

“If it’s an investment, great. If it’s a takeover, and operations move to London, that’s not what we’re interested in,” Duncan told reporters.

“They should quit calling it a merger,” he said.

Kloet in the interview called the deal a “merger of equals” because the company would have co-headquarters in London and Toronto, and some key operations will remain in Canada.

REGULATORY AND POLITICAL GAUNTLET

The LSE-TMX deal will face intense scrutiny. Ontario’s Liberal government said an all-party committee of the provincial legislature will conduct at least four public hearings and make a decision by April 7. The province’s opposition Progressive Conservative and New Democratic parties have echoed Duncan’s skepticism about the proposal’s value.

That adds to the maze of political and regulatory hurdles that lies ahead, including a federal government review of whether the exchange combination will carry a net benefit to Canada.

A spokeswoman for Canadian Industry Minister Tony Clement said speculation on the outcome of the federal process is premature. Even so, she said, provincial economic policies are one of the factors to be considered.

Lawyers consulted about the proposal said it was still unclear how provincial securities regulators would make decisions on whether to approve or reject the deal.

The LSE’s friendly takeover of TMX, announced February 9, would create a global exchange player strong in resource listings. LSE shareholders would hold 55 percent of the combined entity, and LSE would nominate eight of the 15 directors.

“OFFENSIVE PLAYER”

Kloet, who would serve as president of the combined company, said LSE-TMX would “become an offensive player” as exchanges further consolidate in the years ahead.

“We don’t have to do it. We want to do it,” Kloet, an American who took the TMX reins in 2008, said of the LSE deal.

The consolidation bug has resurfaced in the exchange industry after a few quiet years, with Germany’s Deutsche Boerse bidding for Big Board parent NYSE Euronext and Singapore Exchange planning to acquire Australia’s ASX.

But the plans face many political and regulatory hurdles.

Kloet said the LSE tie-up would strongly position the Canadian markets that TMX operates as global competition intensifies. But Duncan said he worries about a trend toward fewer stock markets globally, which could harm smaller Canadian companies.

“You’ll have essentially an oligopoly which means pricing of listings in my view will be going up,” the minister said.

Ontario, Canada’s most populous province, is home to hundreds of thousands of financial services jobs. The province’s Liberal government is not likely to jeopardize any of them, especially with an election scheduled to be held in less than eight months.

Spirited opposition by a provincial government led to the federal government’s rejection of the last big foreign bid for a Canadian company. In November, Ottawa blocked BHP Billiton’s $39 billion offer for fertilizer producer Potash Corp when the company’s home province of Saskatchewan strongly opposed it.

Additional reporting by Solarina Ho; editing by Peter Galloway and Frank McGurty

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