The Toronto Stock Exchange Broadcast Centre in Toronto.MARK BLINCH
Banks opposed to the planned combination of TMX Group Inc. and London Stock Exchange Group PLC are looking for ways to thwart the deal, and are seeking the backing of Canada's biggest pension funds.
Talks among large Canadian financial institutions searching for an alternative to the merger of the Toronto and London stock market operators have been going on for weeks. Options under consideration include a potential counterbid for TMX, which is valued at almost $3-billion.
The discussions remain at a very early stage, according to four people familiar with the situation. Sources stressed that nothing may come of the talks.
Even so, the fact that such discussions are taking place at all underscores how serious the opposition to the TMX-LSE deal is at some of the country's largest financial institutions.
Toronto-Dominion Bank, National Bank of Canada and Canadian Imperial Bank of Commerce have vocally opposed the TMX-LSE transaction. All three banks were signatories of a public letter in early March that criticized the proposed deal as bad for Canada. Now, the banks appear to be trying to come up with a better idea.
Sources said pension funds including Ontario Teachers' Pension Plan, Alberta Investment Management Co., Canada Pension Plan Investment Board and the Caisse de dépôt et placement du Québec have been approached about taking part. At least two of the funds have expressed interest, according to a person familiar with the matter.
One alternative believed to be under consideration is a takeover bid using Alpha Group, which has a trading system that competes with TMX's Toronto Stock Exchange and TSX Venture Exchange. All of Canada's big banks and the CPPIB are shareholders in Alpha.
TMX and LSE announced in February what they called at the time a merger of equals. The transaction was immediately controversial. It came under fire from Ontario Finance Minister Dwight Duncan, who said his concern was that it was actually a takeover of TMX by LSE. About a month after the deal was unveiled, the banks who oppose it went public with their letter, saying in it that "Canadians are quite capable of competing and winning on the global stage. Our success does not depend on selling out or waiting for others to 'save' us."
Louis Vachon, the head of National Bank, has said that his bank is "strongly opposed" to the transaction. Toronto-Dominion Bank chief executive officer Ed Clark has compared the TMX-LSE deal to "giving up" on building up the TMX, saying that "we think we can do better."
Any attempt to gain control of TMX involving Canadian banks would in some ways be a step back in time, as Canada's large banks were among the owners of the Toronto Stock Exchange before it was demutualized in 2000 as a prelude to an initial public offering in 2002.
Trying to combine Alpha and TMX may raise questions with competition regulators in Ottawa, given that TMX and Alpha together would control about 90 per cent of stock trading in Canada. Also, provincial stock market regulators who spent the past 10 years promoting competition to the TMX might view the consolidation of TMX and its biggest rival as a step backward.
So, too, might other users of the TMX's markets, who have benefited from the competition of Alpha and other rival markets because the multiple players have driven down trading fees.
There are other hurdles to a transaction involving Alpha. Two of Alpha's major shareholders, Royal Bank of Canada and Bank of Montreal, are working as advisers on the TMX-LSE transaction. The CEOs of both banks are on the record as supporters of the proposed deal.
It's for such reasons that people familiar with the discussions say that there may be no action taken.
There are signs that as early in the process as two months ago, the banks that have lined up against the TMX-LSE deal were already mulling alternative scenarios. The banks hinted as much in an early draft of their March letter criticizing the transaction, which was obtained by The Globe and Mail. The early draft stated that "there appear to be more compelling growth alternatives to this deal that would continue to create value for TMX shareholders, and better serve its clients and the Canadian economy."
Those words were dropped from the final draft.