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An employee passes a stock board at the Toronto Stock Exchange.Kevin Van Paassen

The Canadian banks leading a $3.6-billion bid for TMX Group Inc. spent weeks laying the groundwork for their offer, trying to pre-empt a government backlash.

The four banks, attempting to derail a merger between TMX and London Stock Exchange Group PLC, knew their bid to buy the parent of the Toronto Stock Exchange would create a near monopoly of trading in Canada, since they also own the smaller Alpha exchange, a rival to the TSX.

The banks, which have been tripped up by Ottawa and the provinces in the past on proposed deals, made a deliberate decision to reach out to government officials and various regulators early, in an effort to smooth their path - so early, in fact, that officials were given a heads-up even before all of the members of the consortium were nailed down.

That's because, while they plan to sell their offer on its merits, they also hope to tap into a sense of nationalism in Canada and drum up opposition to the LSE merger. The banks have learned that having government on side is vital.

By the time the final details of the bid were made public Monday, the consortium had received signals that provincial governments are uneasy enough with the rival LSE bid to make a Canadian-led push palatable.

Dubbed the Maple Group Acquisition Corp., the bid is being led by National Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia and Canadian Imperial Bank of Commerce.

The banks have recruited the backing of five of the country's biggest pension plans: Canada Pension Plan Investment Board, Ontario Teachers' Pension Plan, Alberta Investment Management Corp., Caisse de dépôt et placement du Québec and Fonds de solidarité des travailleurs du Québec.

After attempting to protest the deal to the Ontario government in January, National Bank vice-chairman Luc Bertrand said several of the financial institutions decided to take matters into their own hands and assemble a rival bid. "Sure we can go out and say we don't like the deal, which we did," Mr. Bertrand said in an interview. "But at the end of the day, so what?"

At $48 a share in cash and stock, the offer is a 24 per cent premium to the $40 price of the proposed LSE merger with TMX. However, even with that premium, and the backroom support of provincial governments, Maple Group faces a significant hurdle: It must convince the federal Competition Bureau that the bid is acceptable, even though it would eliminate the rivalry between the two Canadian exchanges.

The watchdog make its own independent review of the proposal, which will focus on whether the deal would create an unfair market dominance for the combined entity.

The banks created Alpha in 2008 because of their concerns that the TSX had no competition on the fees it set for trading. There are worries on Bay Street that consolidation of the Canadian exchanges would push up costs for using their services.

But The success of the deal, Mr. Bertrand and others said, is not predicated on the banks and pension funds squeezing more fees out of clients. Rather, cost savings and the ability to compete more effectively with U.S. exchanges that are eroding Canadian business will be where the group makes its money from the deal. Competition from small and large American exchanges have cut the amount of trading on some of Canada's biggest stocks. Mr. Bertrand said as much as 80 per cent of trading in Research In Motion Ltd., for example, takes place on a variety of exchanges in the U.S.

"We're competing in the same time zone as the biggest market in the world. And we are saying we want to repatriate some of that North-South volume. We are in a North American theatre, and there is no boundary ... so to say that there is no competition in the Canadian exchange space is simply not fact."

The Maple consortium expects to know by fall whether the deal will clear the various regulatory hurdles it faces.

The proposed deal comes as a similar bid to merge exchanges fell through in the United States Monday due to competition concerns. U.S. exchanges Nasdaq OMX and IntercontinentalExchange (ICE) announced they were abandoning a bid to acquire NYSE Euronext after regulators informed them they would not get approval.

Mr. Bertrand does not see similarities between its proposed deal and the one that U.S. regulators turned down, since NYSE and Nasdaq are large exchanges, while Alpha in Canada is a small operation. There is intense competition in North America between exchanges and alternative trading systems, which is "a major constraining factor on trading fees" in Canada, he said.

The banks have not forgotten the lesson they learned in 1998, when they surprised Ottawa with their attempts to merge and were shown who is boss. A number of people involved in the consortium also felt that the government reaction to BHP Billiton Ltd.'s $39-billion bid for Potash Corp. of Saskatchewan Inc., and even the reaction to the LSE bid for TMX, illustrated that it's better to try to get the authorities onside early.

That led the Maple consortium to reach out to provincial governments and Ottawa, as well as securities regulators across the country, to tell them that they were considering putting together a bid when their talks were still at a very preliminary stage. While the group had not even been formed and an offer was far from certain, they told officials that a number of banks and pension funds were exploring options, including one that would keep TMX in Canadian hands.

Those discussions took place within 48 hours after the federal election, but sources said that timing was a coincidence. A second round of outreach took place Friday afternoon, right as TMX was being presented the offer.

The consortium does not include Royal Bank of Canada or Bank of Montreal, which are advising LSE and TMX on the proposed merger, and are prevented from taking part in any discussions. However, should that deal die, those banks will be invited to join the consortium in Canada.

Only 40 per cent of the company would remain public after the deal, with the remainder owned by the investors. The pension funds would own a combined 35 per cent, and the banks would hold 25 per cent. However, no single investor would own more than 10 per cent. the group said.

Sources at a number of pension funds said their reluctance began to fade as it became clear that this deal was not just about nationalism or about having greater control over their trading platform, the numbers illustrated it was a good financial investment that would provide a solid return.

"This is about capitalizing on the TMX's strength to build a better exchange," Mr. Bertrand said on a conference call with analysts Monday. "We believe that the TMX is an outstanding business today that can be an even better and more competitive one tomorrow."

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