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With the LSE merger dead, what's next for the TMX?

Shareholders refuse to back proposed merger, leaving the door open for the Maple Group to proceed with its takeover plans.

The logos of TMX Group Inc. and London Stock Exchange Group Plc (LSE) are displayed on a screen in the broadcast center at the Toronto Stock Exchange (TSX) (Photo: Bloomberg/Getty)

The TMX Group and the London Stock Exchange Group killed merger plans less than 24 hours before shareholders were to deliver the final verdict. TMX said in a statement that while the majority of shareholders who voted by proxy so far supported the deal, it was clear the merger proposal would not receive the two-thirds majority necessary to proceed. The failure to win over shareholders paves the way for the Maple Group Acquisition Corp, a consortium of 13 Canadian financial institutions, to push ahead with its own hostile takeover.

“With the LSE Group, we had crafted a clear and well thought through plan, one that would have grown our business,” TMX CEO Tom Kloet said on a conference call. But he emphasized the TMX can still grow even without the LSE. “As I’ve said many times before, our business is strong, our business plan is successfully progressing,” he said.

Even so, the TMX will review its options, including the takeover offer from Maple. Luc Bertrand, the vice-chairman at National Bank Financial who emerged as the face of Maple, said in a statement the group will continue pursuing the takeover. “We are very pleased with the support our offer received from TMX Group shareholders,” he said. “We genuinely believe Maple’s vision represents the best way forward for TMX Group and the Canadian capital markets.”

The battle for the TMX, which has pit national pride against international ambition, roped in a slew of Bay Street heavyweights. The TMX and the LSE pitched their plans as a “merger of equals” back in February, but critics derided the deal as a TMX takeover and bemoaned the loss of control and decision-making to London. The Maple Group emerged in May with a counteroffer, wrapping themselves in the flag and pitching a Canadian owned and operated alternative for the TMX.

Both sides took pot shots at one another, and sweetened their bids. The TMX board rejected Maple’s bid twice, even though it was a higher cash offer. In the days leading up to the shareholder vote, the TSX-LSE merger appeared to have the upper hand, winning the support of two shareholder advisory firms. But Maple fought back, publishing a statement of support from respected fund manager Stephen Jarislowsky.

Though Maple’s prospects have unquestionably improved, the rejection of the merger isn’t necessarily a wholesale endorsement of its offer. That deal comes with its own set of problems and uncertainties. Some critics, such as TMX shareholder and fund manager Tom Caldwell, fear the takeover will result in too much concentration in financial markets and lead to an oligopoly. 

Kloet himself also flagged the amount of debt in the deal, which he reiterated during the conference call. “I would be concerned about an entity operating at 2.9 times leverage,” he said. “Having the highest leverage in the industry is an issue. Perhaps that’s something we would discuss if and when we have discussions with [Maple].” 

The tone he struck was not exactly favourable toward the Maple proposal, and he preferred to emphasize that TMX could carry on as a standalone company, bucking the industry trend toward consolidation. “This was a deal we wanted to do, not one we had to do,” he said in reference to the LSE merger. “The institution is on extremely solid footing.”

That is exactly the sort of thing one would expect a CEO to say at such a time, but it’s not clear whether going it alone would actually be in the best interests of the TMX or its shareholders. On a global scale, the TMX is a small player with limited opportunities for growth domestically. Rival exchanges are bulking up with mergers of their own, making it difficult for the TMX to expand internationally. The Ontario Teachers Pension Plan said as much back in March. Before it joined up with Maple, the pension plan supported the LSE merger and laid out the stakes for the TMX: “It risks becoming irrelevant entirely if it cannot compete in the global market place through a merger with other exchanges.”

Kloet obviously recognizes the benefits—and perhaps the necessity—of expanding through a merger. After all, before the LSE arrived on the scene, TMX disclosed in filings that it had explored a merger with an unnamed third party in 2010 before talks broke off earlier this year. For now, Maple may not represent the best offer, but it is the only one.