November 17, 2011 / 8:04 PM / in 6 years

TMX deal to run gauntlet of public scrutiny

TORONTO (Reuters) - A consortium that wants to buy Canada’s largest stock market operator will embark next week on its public campaign to persuade regulators the C$3.8 billion ($3.7 billion) deal is good for the country’s capital markets.

In a series of hearings, Maple Group’s plan to buy TMX Group (X.TO), owner of the Toronto Stock Exchange, will come under the scrutiny of the powerful securities commissions of Quebec and Ontario as well as two other provincial watchdogs.

The deal will also require the blessing of the federal Competition Bureau, which may have deep reservations about a plan that would put all of Canada’s largest exchanges back under the wing of the country’s big bank-owned dealers.

If TMX’s stock price is an accurate barometer, approval of Maple Group’s C$50-a-share offer for TMX is far from assured.

The shares were trading at C$44.80 on Thursday, a 10 percent discount to the bid. Investors say regulators will, at the very least, insist on some changes to the current Maple Group proposal, which critics say would create an unfair monopoly.

“If the Competition Bureau really does a great job, they’re going to believe there are various possible conflicts of interest in this deal, and they’re going to demand remedies to make sure those conflicts of interest are controlled,” said Chris Damas, a TMX shareholder and president of BCMI Research.

The plan is to put TMX under the control of the 13 big-league banks, pension funds and other financial institutions that make up the Maple Group.

More than a decade ago the TMX’s predecessor became a for-profit company through a process known as demutualization.

The proposed reconcentration of power in the hands of Canada’s financial establishment would create a one-stop shop for trading and clearing. TMX’s exchanges would unite with bank-owned Alpha Group, Canada’s biggest alternative trading system, while bringing into the fold the country’s national clearing and settlement shop, Canadian Depository for Securities.


The hearings start next week in Montreal, where Quebec’s securities watchdog will hold a public forum. The regulator in the mainly French-speaking province will likely focus on CDS. If the deal gets the green light, CDS would be combined with the Canadian Derivatives Clearing Corp, which is operated by the Montreal Exchange derivatives market, a TMX unit.

CDS currently operates under a “cost-recovery” model, meaning any money it generates helps defray costs for users.

Under the Maple deal, the clearing house would become a for-profit entity that could result in higher fees for customers, critics say.

“I think that will be a very challenging issue for the regulators to deal with,” said Ermanno Pascutto, executive director of the Canadian Foundation for the Advancement of Investor Rights, or FAIR.

“If you have a monopoly - which it will be - the government regulates the pricing of monopolies,” he said. “If you’re going to have a for-profit monopoly, someone has to get into the business of regulating pricing. I don’t think regulators want to do that.”


TMX’s proposed ownership of Alpha - currently owned by many of the same financial institutions that are Maple Group members - is another sore point, especially in Ontario, home province of the Toronto Stock Exchange. Indeed, federal approval of the deal may hinge on the issue.

Ownership of the alternative trading system would give the enlarged TMX control of more than 80 percent of Canadian stock trading.

Even so, Maple Group says its plan to combine Alpha with the Toronto exchange and its small-cap sister, the TSX Venture Exchange, would bring more efficiency to the market, helping to keep trading fees competitive.

The argument is that sufficient competition exists from Nasdaq and the other global exchanges on which Canadian securities trade.

“They will have large market share, but there’s still a framework for competition in this country,” said Alison Crosthwait, managing director, global market structure research, at Instinet, an agency broker and large shareholder in Chi-X trading venues.

Maple and TMX may well find a way to get the deal done if they can agree on a design for a new board that regulators agree would keep the power of Maple’s dealer-owners in check.

A board with independent directors would be in a better position to supervise management and prevent the drive for profit from hurting stakeholders, customers and the public at large, Ontario’s securities watchdog wrote in its notice calling for public comment.

“We have to have the light shining at all times,” said BCMI Research’s Damas.


To be sure, the deal’s chances of winning approval improved last month when TMX’s board decided to embrace Maple’s once-hostile offer, eliminating the most vocal opposition to the tie-up.

“At least there won’t be people with torches and pitchforks raising a riot against the deal,” said Thomas Caldwell, chairman of Caldwell Financial and an outspoken TMX shareholder who had early reservations about the Maple bid.

TMX’s eventual backing of the Maple deal came four months after the collapse of a planned takeover of TMX by London Stock Exchange (LSE.L), and boosted its share price by about 6 percent.

In a signal of confidence a deal may eventually get done, Maple last month agreed to a C$39 million break fee if its proposal fails to obtain regulatory approvals.

Maple has submitted applications to regulators in Ontario, Quebec, Alberta and British Columbia, four provinces where TMX has operations. Public hearings are slated for November 24-25 in Quebec and December 1-2 in Ontario.

($1=$1.02 Canadian)

Editing by Frank McGurty and Peter Galloway

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