TORONTO (Reuters) - A friendly bid for Canadian exchange operator TMX Group could bring growth, higher profits and higher-profile listings, but leading shareholders fear political factors could derail the deal.
The offer for the Toronto Stock Exchange from the London Stock Exchange would create a transatlantic trading venue with a market value of about $6.9 billion, to be 55 percent-owned by LSE shareholders.
A single LSE shareholder -- Borse Dubai Ltd -- would hold just over 11 percent in a deal that is subject to scrutiny by two Canadian provincial regulators, and almost certainly from the federal government as well.
“It’s unfortunate for us as a shareholder that the way this deal succeeds or fails is not going to be on economic merit,” said Jim Hall, chairman of Mawer Investment Ltd, which controls 1.3 million TMX shares.
“It’s going to be on political decisions and that’s a frustrating position to be in as a shareholder.”
Even before the deal was formally announced, Canadian politicians raised concerns about what it might mean for sovereignty and whether the takeover, which the partners repeatedly refer to as a “merger of equals,” would be considered of net benefit under the Investment Canada Act.
On Thursday, most domestic newspapers carried opinion columns about the deal, with most speaking out against it.
“Let’s not delude ourselves. The merger ... marks the beginning of the end for ultimate Canadian control of well-established firms that are listed on the stock market,” business columnist Michel Girard wrote in Montreal’s influential La Presse.
“One wonders why the TSX, the 11th-largest global exchange, would want to lose control of itself to the LSE, the 10th-largest market, except to turn a quick profit, and not a very big profit at that. There’s not much in this deal for TMX Group, nor Canada,” the Ottawa Citizen said in its main editorial.
Under the Investment Canada Act, the federal government reviews foreign takeovers worth over C$299 million ($299 million) to see if they are of net benefit to the country.
In a rare upset, Ottawa blocked the last high-profile deal, BHP Billiton’s $39 billion hostile takeover offer for fertilizer giant Potash Corp, arguing there was no net gain.
“Regulatory risk, I don’t think, is that high. Political risk is extremely high, but I have no idea how high. It’s just such a moving target,” Hall said.
Investors see the LSE offer as one answer to long-standing concerns about the future prospects of the TMX in the face of fierce competition from new electronic rivals like Alpha ATS, a trading venue owned by Canada’s largest banks.
“From an attractiveness of the proposed deal standpoint, there are significant potential synergies here, which obviously make the combination pretty attractive,” said Tim Caulfield, director of equity research at Bissett Investment Management Ltd. Bissett controlled 4.2 mln TMX shares as of December 31.
M&A lawyers predict a drawn-out review of the deal, and say it could take as long as 75 days to get a resolution.
Other stakeholders in the takeover proposal are the provinces of Ontario and Quebec, where TMX has operations.
Quebec’s finance minister said its regulators have power to veto the deal and he has asked the province’s own securities regulator to hold public hearings into the proposal.
Ontario has said it will look at the deal but said it was premature to discuss it further. TMX’s operations are headquartered in Toronto, the capital of Ontario and Canada’s financial center.
“The Potash acquisition was blocked ... and that was really the first big one that we’ve seen in quite some time in Canada,” said Pat McHugh, senior portfolio manager and equity strategist at Manulife Asset Management. “We are now used to saying no. I would not be surprised if we say no in this case as well.”
The TMX-LSE deal was the first in a recent wave of international exchange merger and acquisition activity, with Deutsche Boerse and NYSE Euronext also in “advanced talks” to join forces.
Investors see the LSE proposal boosting the dominance of the Toronto Stock Exchange in the mining and energy sectors, with big gains for Canadian companies. Big-name players on the TSX include Barrick Gold, Potash Corp and uranium major Cameco Corp, as well as BlackBerry maker Research in Motion.
“If this meant that I have some kind of entree into London on a cheap basis or co-listing, or that it would give people access to capital in Europe and in the Middle East, then that would be a huge benefit to Canadian companies, huge,” said Thomas Caldwell, whose firm Caldwell Securities is a major shareholder in TMX Group and other exchanges.
“We believe this is a good development for investors in that it creates greater trading efficiency,” said Leo de Bever, chief executive of the Alberta Investment Management Corp public sector pension fund.
Since taking office, Canada’s Conservative government has blocked only two foreign takeovers, the Potash-Billiton deal last year, and the sale of a satellite unit of Macdonald Dettwiler and Associates to a U.S. company in 2008.
Additional reporting by Scott Haggett and Jeffrey Jones in Calgary, Claire Sibonney in Toronto and David Ljunggren in Ottawa; editing by Janet Guttsman and Rob Wilson