TMX snubs its suitor

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TMX Group Inc. is refusing to jump into Maple Group's open arms, marking the beginning of what could be a long dance between the TMX board of directors and the bank-led consortium that wants to buy the company.

After TMX terminated its merger with the London Stock Exchange earlier this week, Maple, a group of 13 financial institutions that includes four major banks, signalled that it wants to turn its hostile $50-a-share bid into a friendly deal. On Thursday, TMX chief executive officer Tom Kloet said "we're not anywhere near" friendly negotiations with other parties.

That could change. Next week, TMX's board meets to hash out its game plan. During those talks, the board will have to decide whether Maple's bid truly creates long-term value and doesn't simply offer short-term cash to lure current shareholders. The board must also discuss the merits of TMX as a standalone company, or the possibility of merging with another exchange - both of which are options the Toronto Stock Exchange's parent company has not ruled out.

And if the directors determine that selling to Maple is the best option, they face another task: trying to get a higher offer when there are no other bidders.

"I don't think they are anxious to go after the Maple proposal, but I'm sure the board will perform their responsibility" to thoroughly review the bid, said Ed Ditmire, an analyst at Macquarie Group. "If they don't, there's a very realistic possibility that shareholders all tender their shares to Maple and the board and management is replaced."

In the latest circular for its LSE deal, TMX's board declined to either endorse or reject Maple's bid. Until Wednesday, TMX was unable to enter into friendly talks with Maple because it had signed an exclusivity agreement with LSE. But the planned merger with the London exchange fell apart when it became clear it would not receive the required support of two-thirds of shareholder.

If Maple and TMX enter friendly talks, the exchange will surely ask about the chances of getting its bid past the federal Competition Bureau. "I think the competition hurdle is a significant hurdle," Mr. Kloet said.

The debt in Maple's bid will also be a hot topic. TMX has previously denounced Maple for pledging to tack on more than $1.5-billion in debt to simply buy back shares, something that TMX could do on its own if it wanted to. For that reason, Mr. Kloet has previously cast Maple's bid as nothing more than a leveraged recapitalization, which boosts share profit if the company does not grow.

Because these issues are such hot topics, some investors are skeptical of Maple's odds of success. TMX shares closed at $43.80 on Thursday, well below the $50 a share Maple is offering.

Shareholders must also weigh Mr. Kloet's suggestion that TMX could go it alone. "We, first off, like our business plan and our growth opportunities," he said, noting that TMX has been expanding internationally on its own with deals like its latest data-sharing agreement with Nasdaq. TMX also has technology-sharing agreements with IntercontinentalExchange and the LSE. The deal with the LSE ultimately led to the merger proposal.

Macquarie Group's Mr. Ditmire admits that TMX "could try to make a more attractive standalone case through becoming more efficient, which means a restructuring that cuts costs and increases profits, or it could be on the financial side through coming up with ways to borrow more and pay out more dividends, increase the regular dividend, [or]borrow to buy back stock."

However, one possibility that seems difficult is another merger attempt with a large foreign exchange, Mr. Ditmire said. It has been reported that Nasdaq was looking to strike a deal with TMX in 2010, but foreign investment issues were a big question mark. Now that the LSE deal was voted down, TMX will be viewed by other international players as tricky to do a deal with, he said.

Still, TMX isn't ruling the option out. "We are now in a position to interact with whoever we so choose," chairman Wayne Fox said, adding that the company has a fiduciary responsibility to maximize value for shareholders.

On top of future plans, Mr. Kloet offered up some thoughts on the failed deal on Thursday. "I am naturally disappointed in this outcome," he said. "However, our shareholders have spoken. I respect your decision."

Asked if he would have changed his tactics, Mr. Kloet said: "I wouldn't do anything different, frankly." That includes the decision not to sweeten the merger after Maple raised its offer to $50 a share and threw in extra cash.

"It truly was a merger of equals," he said, noting that board power was split between Canada and Britain. "If you start tweaking any elements of that, you begin to alter a very carefully crafted agreement."

With files from reporter Emily Jackson