LSE Faces Rival Bidder In TMX Deal
Tuesday, May 17, 2011

TMX Group, the operator behind the Toronto Stock Exchange, has received a written proposal for acquisition from a consortium of Canadian investors, which, although not binding, represents a substantial challenge to the conclusion of a merger deal with the London Stock Exchange Group.

The offer, made by a collective calling themselves the Maple Group Acquisition Corporation, was made on May 14, and claims to preserve Canadian governance, decision-making and regulatory oversight of TMX, while enabling the company to pursue strategic opportunities internationally. Many of the claims made by Maple echo those given by proponents of the TMX/LSE deal, including the promise to boost international competitiveness, and be beneficial to stakeholders. Where this offer differs, however, is in its assertion that its stipulations cater far more to the securing of Canadian interests, and in its higher estimation of TMX's worth.

Composed of five pension funds, and four of Canada's leading banks, the membership of Maple is as follows: Alberta Investment Management Corporation; Caisse de dépôt et placement du Québec; Canada Pension Plan Investment Board; CIBC World Markets Inc.; Fonds de solidarité des travailleurs du Québec (F.T.Q.); National Bank Financial Inc.; Ontario Teachers' Pension Plan Board; Scotia Capital Inc., and TD Securities Inc.

TMX broke the news, stating that its board of directors would evaluate the proposal. No further comment will be made until such analysis is complete, but, in the meantime, TMX will continue in its efforts to secure the shareholder and regulatory approval required to complete the LSE merger.

Maple confirmed its offer on May 15, providing details which had not been previously released by TMX. Under such a deal, existing shareholders of the TMX Group would own 40% of Maple's outstanding shares, pension fund investors would take 35%, and bank-owned investment dealers 25%. No shareholder would own more than 10% of these shares.

Seeking to outdo the LSE, a key component of the Maple proposal is the directorial makeup it offers TMX. Thomas Kloet, CEO of TMX, had previously been forced to defend this element of the LSE merger, stressing that with himself as chairman, and seven Canadians on the board, the independence of Canadian stock exchanges would not be subsumed within the new entity. Maple has now pledged that at least half of the directors will be independent, at least 25% will be Quebec residents, and at least 25% "will have expertise in or be associated with the Canadian public venture market, with fair and meaningful representation of directors with expertise in derivatives".

Not only this, but a Maple acquisition would not require approval under the Investment Canada Act, whereas the LSE merger would. According to the Act, a substantial corporate takeover cannot be approved by the government unless it is deemed to be of "net benefit" to the nation, and both Ontario's and Quebec's provincial regulators are required to approve substantial alterations in the ownership of the TMX Group.

In addition, the proposal effectively values TMX at CAD3.2bn (USD3.3bn), offering CAD48 per share. This, Maple says, represents a 24% premium to the implied value of the LSE deal, and a 20% premium to the volume weighted average price of TMX Group shares in the 20 days prior to the offer's announcement, another potential trump card.

Speaking on behalf of Maple's investors, Luc Bertrand, Vice-Chairman of National Bank Financial Group, said: "As like-minded investors, we believe there is an opportunity to create significant value by capitalizing on TMX's strengths to build a stronger integrated exchange and clearing group - and by doing so, to secure the future growth and ongoing integrity of the Canadian capital markets. We believe our offer constitutes a superior proposal under which shareholders would receive cash, plus the opportunity to continue to participate in the company's ongoing growth. We welcome the opportunity to work with TMX's board and management to capture the benefits of our proposal for the company and all of its stakeholders."

The LSE has since reaffirmed its commitment to the merger, noting that, as Maple's offer has not formally been made, there is no certainty that it will be forthcoming. In a statement, the Group reiterated the impact it believes the deal will have, maintaining that it offers "compelling, strategic and operational benefits for shareholders, market participants, listed companies and investors". Like TMX, the LSE promised to continue in its work towards the completion of the merger.

Both the LSE and TMX posted their most recent profit results the day prior to the announcement of Maple's offer. The LSE's were for the year ended March 31, 2011, and show total income up 7%, to GBP674.9m (USD1.09bn). Adjusted operating profit reached GBP341.1m, up 22%, and adjusted basic earnings per share rose 23% to 73.7p. TMX's first quarter profits show revenue increased by 17% on Q1 2010, reaching CAD174.7m, with net income up 13% to CAD64.3m. Diluted earnings per share were CAD0.84, and adjusted diluted earnings per share hit CAD0.97, both results up from CAD0.77 each.