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Will Maple trade at $50 after TMX buy? Doubt it

Canadian competition regulator says hurdles remain on TMX Group-Maple Group proposal.

Norm Betts/Bloomberg News/Norm Betts/Bloomberg News

Update adds notes on accretion in paragraph 10.

What will Maple Group shares be worth if the consortium succeeds in buying TMX Group Inc.? Judging by TMX's rapidly slowing business, it may not be the $50 that Maple is planning to pay.

Maple has made a $3.8-billion cash and stock bid for TMX that is valued at $50 a share. If the deal succeeds, which looks increasingly likely, a portion of TMX will remain publicly held. That means investors need to start thinking about what that stock will be worth.

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Will it trade at $50? Unless Maple has a lot of tricks up its sleeve, it doesn't look good.

There are a lot of moving parts in the Maple bid, so it's hard to be definitive about a per-share valuation of the stock that will be outstanding after the transaction. However, what you can say definitively is that the TMX business is not in the kind of shape that people expected when Maple put $50 on the table last year.

Expectations for how much TMX can earn are falling fast. Last year, there was optimism that the company would earn $4 a share this year. Of late, with financial markets slowing, the consensus 2012 estimate had dropped to $3.65. Now, after TMX reported a drop in earnings Friday for the first quarter, that estimate is going to come down again.

Friday morning, TMX reported earnings of 76 cents a share in the first quarter, well short of the 88 cents a share that analysts had projected. Unless TMX's business rebounds in sharp fashion in coming quarters -- which doesn't look likely based on April's trading activity -- earnings of something more like $3.20 to $3.30 a share in 2012 are not out of the question.

Put a 12 times earnings multiple on that, to reflect where TMX had traded before bids for the business started coming in, and that suggests the stock is worth $39, before any gains from synergies and new ideas that Maple brings.

However, that 12 times might be a little rich, as multiples in the trading business are not as good as they once were. NYSE Euronext now gets an 11.5 multiple of 2012 earnings. Nasdaq OMX gets 9 times forward earnings. London Stock Exchange Group Plc fetches 11.3 times.

For TMX, if you dial back the 12 times even one notch to 11 times, the unsupported valuation falls to more like $36. (Which also gives some sense of where this stock is headed if the Maple bid fails.)

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The transaction is structured in many ways like a leveraged recapitalization. Some estimates put the accretion per share from the new capital structure at about 20 per cent. That means that even if earnings per share drop to $3.30 in 2012, the Maple structure would boost it through simple financial engineering back to close to $4. At a 12 times multiple, that's $48. At 11 times, that's $44.

The upshot is Maple needs to bring a lot of synergies and additional profit to the table through its plan to merge in the CDS clearinghouse and the rival Alpha trading system, or there's not much likelihood that the stock trades at $50 after the deal goes through. Investors are going to want to see a lot more detail from the consortium on how it's going to make that extra profit happen.

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