Maple Group's next stop in bid for TMX Group: Ottawa

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With the London Stock Exchange Group out of the way, the 13 financial institutions that have joined together to buy control of the TMX Group Inc. can now focus on clearing their biggest hurdle: securing approval from the federal Competition Bureau.

Wednesday's decision by TMX and the LSE to abandon their merger, a day before a shareholder vote they were sure to lose, means that new scrutiny now falls on Maple Group Acquisition Corp. Its $50-per-share bid has failed to win over the TMX board and a large minority of shareholders who cast their ballots in favour of the LSE bid. For Maple's bid to succeed, it needs to obtain 70 per cent of the shares.

Before it gets to that stage, Maple will first have to find a way to satisfy the Competition Bureau that creating a near-monopoly on some vital financial services like stock trading will not be harmful to investors and businesses. The competition commissioner, Melanie Aitken, has taken an aggressive stance lately against monopolies, most recently this week when she filed an application to stop a proposed joint venture between Air Canada and a U.S. airline because it would it reduce competition on some routes.

Maple was formed this spring as an alternative to the proposed merger between TMX and LSE. A key component of Maple's plan is to buy the Alpha Group, an alternative stock market that is owned by some of the same financial institutions in the Maple group, and combined it with TMX. But that would leave the single merged entity with more than 80 per cent of the equities market in Canada. Sources say the bureau has already reached out to people involved in Maple to start its research. The Competition Bureau ruling is expected later in September or October.

"You have massive concentration [of ownership]in the investment industry already and now when you do it right back to the exchanges you almost have total dominance by a very, very few firms and the banks in particular," said Tom Caldwell, chairman of Toronto brokerage Caldwell Securities and a TMX investor who supported the LSE merger. "That has impacts on the economy."

On price, there is no question that Maple's deal enriches shareholders in the short-term. TMX traded at about $40 per share before any mergers were announced; Maple's offer is worth $40 per share in cash, plus a small stake in a post-merger company.

But there are still questions about how much value TMX's deal provides long-term and whether its debt load is sustainable. Maple has proposed tacking on $1.5-billion in debt to recapitalize the balance sheet and buy back shares, which immediately offers higher earnings per share even if the company does not grow.

The TMX-LSE vote tally suggests that getting enough shareholder support for Maple's bid might not be a certainty. About 55 per cent of the votes counted by midday Thursday were in favour of the LSE merger - short of the two-thirds threshold required, but still significant. Bill Holland, chairman of CI Financial Corp., co-signed a public letter that supported the deal and warning of the monopoly that Maple would create. CI owns 10 per cent of TMX.

To do that, the consortium will have to quell concerns about the debt level in its bid. Maple plans to raise TMX's leverage to at least 2.9 times its earnings before interest, taxes, depreciation and amortization, which pushes up on the company's debt covenant at 3.5 times, and a regulatory requirement to stay under 4 times.

Moreover, some on Bay Street believe that the synergies Maple expects to gain from wrapping Alpha Group and another company, the CDS Inc. clearing system, into TMX could be vastly overstated.

Integrating CDS is expected to drive part of these cost savings, as it would allow Maple to merge it with the Canadian Derivatives Clearing Corp. and streamline back office operations. Doing so would also make TMX a vertically integrated exchange that controls equity trading as well as clearing and settlement.

Maple has pushed hard on this issue, noting that other vertically integrated exchanges like Deutsche Bourse and the Australia Securities Exchange trade at higher price-earnings multiples.

"There's a lot of open questions here," said Nick Thadaney, head of ITG Canada. For example, with CDS and CDCC, "no one's ever integrated what they are talking about integrating." Maple's proposal is "a lot of conjecture" and market participants need more information on the specifics of its plans, he said.

His suspicion was echoed by Wendy Rudd, partner at bank consulting firm Capco.

"On one hand, clearing and settlement are seen as cash cows for the vertically integrated exchange businesses," she wrote in an e-mail. "On the other hand, realizing those synergies holds out the promise of cost savings to the industry."

Maple has long stated that it hasn't been able to quantify the synergies from wrapping in CDS and Alpha because it hasn't had access to TMX's books.

That could soon change because an LSE deal is no longer on the table and TMX's board could open up negotiations.

As for Maple, its structure could also change to include the likes of Royal Bank of Canada and Bank of Montreal, which had been excluded from joining because they advised on the TMX-LSE deal.