The Investment Canada process is hard to handicap but one of the best analysts of the trading world has given it a try and found that it's unlikely that there's enough benefit for Canada in the TMX Group Inc.-London Stock Exchange Group Plc combination to win approval from Canadian regulators.
Alison Crosthwait, director of global trading research at brokerage firm Instinet, dug into the Act and its questions to try to get a sense of the net benefit calculation that Industry Minister Tony Clement will have to make when determining whether to green light the deal for TMX .
Ms. Crosthwait is one of the most knowledgable analysts there is on the byzantine world of Canadian trading, with its myriad technologies, rules and regulators. (It's worth pointing out here for the record that Instinet does own a trading system called Chi-X that competes with the TMX's Toronto Stock Exchange.)
She looked at Investment Canada criteria like how much Canadian participation will be in the new enterprise, how the deal fits with Canadian industrial, economic and cultural policies and the contbribution to Canada's ability to compete in world markets, and found the deal could be negative on all those counts.
"We do not believe that the proposed merger, as currently constituted, will make it through the Canadian regulatory process," she said in a research note Tuesday.
That's not to say that she didn't find some positives. She found that "we see the ability for a combined TMX/LSE to promote Canadian issuers to European investors as a benefit to the Canadian economy, albeit one that will likely take years rather than months to realize."
She also pointed to the possibility that "competition in the Canadian trading venue space will be enhanced due to new technological and product development capabilities of the combined entity."
But she argued such positives were outweighed by the fact that LSE would have a slight edge in governance (getting the CEO seat and one more board seat) and that Canada's influence could be watered down further in coming years.
"If the current trend in exchange consolidation continues, this will likely not be the last deal made by LSEG. And with the addition of new entities – with different economic interests, cultural nuances and regulatory requirements – Canada's importance will almost certainly wane, regardless of what businesses the combined entity bases in Canada post-close."
One of the biggest hurdles may be intangible -- the symbolic importance of having a national exchange company.
"Canadian policy seeks to ensure Canada's "ownership" of its culture. As the Toronto and Montreal Exchanges are important at both strategic and symbolic levels, we do not believe that the government will feel comfortable ceding control of either. While the least concrete, this factor may ultimately prove to be one of the most important determinants in Minister Clement's decision," Ms. Crosthwait wrote, adding that public opinion will play a big role.
"Much of the Canadian public is asking, "What does this mean for me?" The answer, unless investment in Canada increases in a dramatic way, is likely "not much," at least in the short to medium term. That being the case, most Canadians seem unwilling to give up control of their national exchanges."
TMX's response is that the transaction is of net benefit and the exchange will show that to regulators.
"We believe TMX Group's merger with London Stock Exchange Group delivers clear and significant benefits to Canada," said Carolyn Quick, a spokeswoman for TMX. "We will work closely with our regulators and with governments to ensure they too recognize the important benefits to Canada that we see in this merger."