Nuts and bolts of the TMX-LSE deal

Share

What does the ruler of Dubai have to do with the proposed deal to merge the Toronto Stock Exchange and the London Stock Exchange? What is Holdco? And why is the Italian securities commission involved? We answer key questions about the ins and outs of the blockbuster stock exchange merger - with a little help from the 213-page merger agreement released Wednesday by the two partners.

Who owns the Toronto Stock Exchange?

The exchange used to be owned by Canada's largest brokerage firms, but it became a for-profit company in 2000 and then a publicly traded company with much wider ownership in 2002. The exchange is currently owned by parent company TMX Group Inc., which is based in Toronto. No one owns more than 10 per cent of the shares of TMX Group - and no one can do so without approval of the Ontario and Quebec securities regulators.

Who would own the new merged company?

Short answer: Dubai and Qatar would own a lot of it. Borse Dubai owns 20.6 per cent of the London Stock Exchange and Qatar Investment Authority owns 15.1 per cent, giving the two Gulf states a 36-per-cent total stake. The deal terms say LSE shareholders would own just over half of the merged company - 55 per cent - which means Borse Dubai and Qatar Investment Authority would own almost 20 per cent of the new company. Borse Dubai is controlled by the emirate's ruler, Sheikh Mohammed bin Rashid Al Maktoum.

What would the new merged company be called?

"Holdco" has a nice ring to it. The TSX and LSE would continue to operate under their existing names. No name has been determined yet for the parent company that would own the two operations. Legal documents are generically calling it "Holdco" - short for holding company -for now. Shares of the new merged company would trade in both Toronto and London.

Where would the head office be?

The company would have co-headquarters in Toronto and London, and the agreement requires "one or more global business units and one or more support functions" be headquartered in Toronto. There is an undertaking in the merger agreement that the global primary stock markets business would be based in Toronto and the group's finance function would be run from Toronto. Montreal would be the headquarters of the global derivatives operation and Calgary would house the global energy business unit.

Who would run it?

Initially, the chief executive officer of the new company would be Xavier Rolet, the London-based CEO of London Stock Exchange Group PLC. TMX Group CEO Tom Kloet would become president of the new company while TMX Group chief financial officer Michael Ptasznik would become CFO. Both Mr. Kloet and Mr. Ptasznik would be based in Toronto.

How would it be governed?

The company would have a 15-member board of directors, chaired by TMX chairman Wayne Fox. It would have seven Canadian directors on the board, including the most senior executive of the new company who is based in Canada and at least four independent Canadian directors. Initially, the Canadian directors would include the chairman, CEO and CFO of TMX Group and four independent directors. It is envisioned that three of the eight board seats appointed by the LSE would be from the Borsa Italiana, which the LSE controls. One-third of the board meetings would be held in Canada and a majority will be held in Britain.

Can these commitments be changed?

Yes. The board composition conditions would be in effect for four years and could change after that. The merger agreement lays out conditions under which Canada could lose directors from the board and lose executive positions. Business functions could be shifted to other jurisdictions at any time as long as there is an overall balance between global business units headquartered in Canada, Britain and Italy. The balance is subject to adjustment in the event of a significant acquisition or business expansion in other regions.

What is a "merger of equals"?

In a takeover, one company acquires another, usually smaller, entity by paying cash or stock to the target's shareholders. In a "merger of equals," however, two companies of roughly the same size combine through some form of stock swap. What's more important, though, is who is running the show. Key executive roles might be divided up initially, but sometimes it becomes clear over time that one firm is predominant in management or control. In this case, LSE shareholders would end up with about 55 per cent of the combined entity's stock, the British firm would have eight of 15 directors, and the chief executive officer would come from the LSE. But the TSX would supply the company chairman and chief financial officer.

What's the deal worth?

TMX Group shareholders would receive 2.993 London Stock Exchange PLC shares for each of their TMX shares, which means they would own 45 per cent of the merged company. After the deal closes, the London company would be renamed to reflect its broader scope. The combined companies currently have a market value of $7.1-billion (Canadian).

Who must approve the deal?

A slew of bodies have to give their nod before this deal can be done. First, a majority of LSE shareholders have to say "yes," as do two-thirds of TMX shareholders. An Ontario court has to approve the plan, and securities regulators in Britain, Ontario, Quebec, British Columbia, Alberta and Manitoba will have a say. Because the two companies have operations in the United States and Italy, the U.S. Securities and Exchange Commission and the Italian securities commission will get a chance to weigh in. And of course Ottawa will play a key role, because the merger is subject to the Investment Canada Act and the Competition Act.