Canada’s homegrown TMX bid works on its own merits

May 17, 2011

By Chris Hughes and Rob Cox
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

LONDON/NEW YORK — This time around, Canada doesn’t need to resort to protectionism to keep a strategic asset in Canadian hands. The C$3.6 billion domestic counterbid for TMX, the operator of the Toronto Stock Exchange, by the jingoistically-named “Maple” consortium makes sense on its own merits. It offers TMX shareholders a clear premium and potentially compelling industrial strategy. It’s not easy to see how the London Stock Exchange can beat it.

To be fair, the LSE’s bid was necessarily pitched as the kind of offer a government concerned about the hollowing out of its financial sector might be inclined to accept. It was all in stock, giving the Canadian exchange’s owners 45 percent of the group — and the impression they would be signing up to a politically-palatable merger of equals.

Trouble is Bay Street’s biggest banks saw this for what it was: a takeover of the market on which the city’s position as a global financial center in the metals and mining industry resided. So they’ve banded together to offer a deal worth C$48 a share — a premium of about 20 percent to the current value of the LSE offer.

About two-thirds of the offer comes in cash. The remainder consists of shares in a new group that — in echoes of the deals that created NYSE Euronext and Deutsche Boerse — will combine the Toronto and Montreal bourses with Alpha, an alternative trading platform, and a majority stake in Canadian Depository Services, Canada’s main securities clearing house.

The move may have a whiff of protectionism coming after Canada blocked BHP Billiton’s proposed takeover of Potash Corp. But the driving force appears to be TMX customer interest. And even if they are primarily interested in creating a national champion, TMX shareholders aren’t obviously being victimized in the process.

True, Maple’s plans add competition risk to the mix. TMX won’t want to drop the LSE until it’s clear that Maple can deliver. But if it does, the LSE would be ill advised to respond. Not only would it have to pay more than is justified by the cost savings it has promised, it would likely have to drop the pretense of its merger of equals.

That, in turn, would raise further hackles from Canadian protectionist interests. Put it all together and the Maple Leaf, not the Union Jack, looks most likely to win the day.

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