The group of financial institutions that are trying to buy TMX Group Inc. and create a dominant Canadian markets company has hit a roadblock on a key part of its plan, as negotiations to buy rival stock market operator Alpha Group are stuck over a big disagreement on price.
The consortium, known as Maple Group, wants to buy TMX for $3.8-billion. It also wants to buy privately-held Alpha, TMX's biggest competitor in the stock market business in Canada, then combine Alpha and TMX into an entity that would be home to more than 80 per cent of all share trading in Canada.
However, the parties are nowhere close on a value for Alpha, according to people familiar with the situation. Maple is offering something in the range of $100-million to $200-million, while Alpha is looking for something in the range of $450-million to $600-million, the people said. The expectation is that the parties will likely have to go to binding arbitration to set a price.
Discussions "are starting to become more constructive, but they are so far apart," said one person briefed on the talks.
Representatives from Maple and Alpha declined to comment.
The dispute over how much Alpha is worth adds another obstacle to a deal that already faces many. Canada's competition regulator has already signalled she has "serious concerns" with the idea. Four securities regulators, led by those in Ontario in Quebec, must also approve the transaction.
Should regulators block the Alpha deal, Maple has said it will drop plans to buy TMX. On the other side, if TMX thinks Maple is paying too much for Alpha, TMX can back out of the deal to merge with Maple.
What's more, the Alpha situation is complicated by an interlocking web of conflicts of interest.
Alpha was founded in 2007 by a group of banks looking to compete with TMX, in hopes of driving down the fees that TMX charges for services such as trading. They also hoped to build a valuable business that might some day be sold.
Now, some of those same banks have turned around and become part of Maple. Of Alpha's nine major shareholders, six are members of Maple Group. They include Toronto-Dominion Bank, National Bank of Canada and the Canada Pension Plan Investment Board. Even though they are Alpha owners, they now have an incentive to try to pay as little for Alpha as possible.
Another Alpha shareholder, Bank of Montreal, is not a member of Maple but it is advising TMX on its plan to merge with Maple.
The parties have brought in outside bankers to advise on a deal but so far it hasn't helped. Lazard Ltd. is aiding Maple on its bid for Alpha. FT Partners, a U.S. firm that specializes in financial businesses such as stock markets, is working with the Alpha side, sources said.
Alpha is said to want a premium based on what other markets around the world have recently sold for plus the strategic value to TMX of removing its biggest competitor from the market.
Meantime, Alpha has received permission from the Ontario Securities Commission to transition from being a stock market, where stocks can be bought and sold, to gaining legal status as a stock exchange. That means it will be able to compete with TMX and offer listing services to corporations, which has the potential to make the business more valuable.
The business of listing companies, a quasi-regulatory function that involves vetting companies on whether they are suitable for public markets, is a rich source of fees for TMX. While Alpha would not be a big competitor initially, it could still put pressure on those fees.