Suitors offer TMX owners uninspiring choice

June 13, 2011

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Pity TMX Group’s poor shareholders. The owners of the Toronto stock exchange face an unenviable choice of suitor. Neither the London Stock Exchange nor Maple Group, which went hostile with its C$3.7 billion ($3.8 billion) counteroffer on Monday, has made a compelling bid for the bourse.

On pure value, Maple’s deal looks better. At C$48 a share, the group of 13 Canadian banks and pension funds is offering around 6 percent more than the current value of LSE’s agreed bid — and is promising 70 percent of it in cash.

But it’s a complex structure. Investors will only receive the remaining 30 percent at some undetermined point in the future. And it will come in the form of shares in Maple, which at present is a shell company hoping to merge TMX with an alternative trading platform and a securities clearing house it doesn’t yet own.

If Maple fails to fold these two in, TMX’s shareholders may end up handing over control for C$33.60 a share, around 15 percent below the exchange’s price before merger mania kicked off in February. And they’d own one of the most highly leveraged exchanges in the world to boot.

That may make the LSE bid look more appealing to some. It’s a straight-up stock deal and the C$350 million present value of expected cost savings helps close the valuation gap. But there’s no cash in the offer. And the value of the deal looks artificially inflated thanks to the takeover premium in LSE’s own stock: the London bourse’s shares have jumped 16 percent since Nasdaq pulled out of the battle for NYSE Euronext last month. If it starts to look more likely that LSE will win TMX, there’s a danger the takeover hope leaches out of its stock.

On top of all that, each side is pitching a lackluster and defensive strategic rationale. That makes the choice even more underwhelming for shareholders facing two bids that could easily fail to deliver on the financials. They’d probably lose out if they chose neither in the end, but there’s nothing to make them to jump at either in a hurry. Little wonder that TMX shares currently trade below both the offers. That’s the ultimate thumbs-down.

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