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Details of the LSE-TMX deal that might give you pause

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What the exhibits show Tucked away at the back of the LSE-TMX merger document is some fascinating reading.

Exhibit A contains the undertakings of the proposed marriage of TMX Group Inc. and London Stock Exchange Group PLC, and Exhibit B some fine points for the regulatory folks. You need to read both together to get the flavour of what they're saying about "Holdco," or the LSE Group after a deal has closed.

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[See for yourself: Noteworthy details in the TMX-LSE merger agreement]/relation>

It's in legalese, of course, but here are some highlights:

  • The combination will be "a merger of equals" with headquarters in London and Toronto.
  • Initially, from the European side, the board will include the LSE chairman and CEO, the CEO of Borsa Italiana, and five more from the existing LSE board. From the Canadian side comes the TMX chairman, CEO and CFO, and four independents from the TMX board. Going forward, the board will have 15 directors, seven of them Canadian.
  • At least one of the board's standing committees will be chaired by an independent Canadian director.
  • One-third of the board meetings will be held in Canada.
  • The role of the chair will be "consistent" with corporate governance principles in both countries.
  • The chairman, president and CFO will be a Canadian resident.
  • Toronto and London will be co-headquarters, with "one or more global business units and one or more support functions being headquartered in Toronto." The derivatives unit will be based in Montreal, run by a Montreal resident, and the energy unit will be based in Calgary, run by a Calgarian.
  • There are also commitments related to independent directors and Quebec.
  • If the board expands via another deal, the minimum number of Canadian directors can change. There's a formula depending on size and event. "By way of a numerical example, if Canadian directors constitute seven of a 15-member board before the change, and the change results in nine of those 15 directors continuing as directors, with six new directors joining the board, Canadian directors must constitute at least 4 (7/15 of nine) of the new 15-member board."
  • After the fourth anniversary of the undertakings, the number of Canadian directors can fall to whichever is greater: Three or whatever the board determines is appropriate "in light of the overall current and prospective significance of the Canadian business to the Holdco Group business as a whole."
  • If the CEO eventually becomes a Canadian, the commitments on the other jobs are not applicable.
  • Global business units and support functions based in Canada can be moved at any time as long as Holdco "maintains both an overall balance between global business units and support functions headquartered in Canada and those headquartered in the U.K. and Italy, and an overall balance between members of senior management who perform their duties and responsibilities and are Canadian residents and those who perform their duties and responsibilities and are resident in the U.K. and Italy, in each case as determined by the Holdco board."
  • The undertakings can be adjusted if there's a major acquisition or expansion outside of Britain, Canada and Italy that changes the "scale or profile" of the Canadian business relative to the overall company. That could mean a change by adding extra co-headquarters or relocating units, support functions and senior mangement positions. In that case, though, the directors will consider "the principle that the combination is a merger of equals and that the Holdco Group will continue to be co-headquartered in Toronto."

None of this is to suggest that TMX didn't wring significant concessions from London, but it does pose some questions.

The TMX debate begins The debate now begins over whether today's LSE-TMX deal would represent a loss to Canada of a national asset or the creation of a superpower in a world of cutthroat competition.

As Globe and Mail Streetwise columnist Boyd Erman reported late yesterday, the deal will form the world's premier market for resource companies if it is blessed by regulators.

And as our European correspondent Eric Reguly reports today, the two bourses combined will have 6,700 listings, more than any other exchange in the world, with a collective market value among those companies of almost $6-trillion.

There's no doubt a merger of the two would create a force in an era of global consolidation among bourses. But will it fly? Industry Minister Tony Clement doesn't even know yet whether he'll review the proposal.

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First, they're billing it as a "merger of equals" - I lost count of how many times that phrase was used in news releases and public comments - but it really smells like a takeover of the TMX by the LSE.

Read their comments to mean they don't want it called a takeover. As in, Canadians lost many of their resource companies to foreign players, so please let's not bill this a loss of the resource marketplace.

Which is it? It's not as clear as these things normally are, and Toronto folks are getting a lot out of the deal, but the bottom line is that the LSE is paying TMX stockholders 2.9963 LSE shares for each share they own. After the deal, the shareholders of the LSE will hold 55 per cent of the merged company, and the LSE folks will hold eight of the 15 board seats.

The LSE also gets the chief executive position of the combined group - current LSE CEO Xavier Rolet - while the TMX gets the positions of chairman, president and CFO. There will be co-headquarters, and there's no premium being paid. But, all in all, it sure smells like a takeover. Given the fuss over the successful takeovers of Canada's big mining companies, and the blocked bid for Potash Corp. of Saskatchewan, how might this one play?

"The deal requires approval from Canadian regulators, which could be a stumbling block," GMP Securities analyst Stephen Boland said in a research note.

"To our knowledge, there is a restriction barring any single entity from owning more than 10 per cent of a Canadian exchange. Additionally, the TMX plays an integral role in regulating Canadian markets and regulators may take issue with a combination. Although it was reported that regulation will be unchanged effectively control is passing from Canada."

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Quebec and Ontario are already raising red flags.

At a news conference in Toronto today, TMX and LSE officials stressed the deal's merits in Canada, and they made the right noise about places like Calgary and Vancouver. And, bless him, LSE chief Xavier Rolet, who was born in France, began his comments in French, then stressing the "balanced ownership" and "balanced governance" of the marriage.

Foreign investors are already awaiting clarity on ownership in the wake of the failed Potash bid, so this may not be the best time for this issue to land back in Mr. Clement's lap.

"On that, Tony Clement promised a report that would outline the background analysis on which he based his decision to reject the deal," said Charles St-Arnaud of Nomura Securities in New York, noting a report was to have been released in early December, and then was delayed.

"In my mind, it reinforces the general impression that the decision was taken at the last minute, on the back of political considerations," Mr. St-Arnaud said. "I think that not having any clarification on the guidelines used for the rejection of the Potash deal puts some uncertainty on every deal that is reviewed and analysts now have to take into account the political climate, in addition to the economics, when assessing deals."

Paul Blythe, the CEO of Vancouver-based Quadra FNX Mining Ltd., told The Globe and Mail's Brenda Bouw that, while a TMX-LSE deal could be good for his business, he can't see Ottawa agreeing to it.

"At face value, Canada would lose some control of it's capital markets plus regulatory control," he said. "I can't see this flying in the present minority environment."

Professor Louis Gagnon at the Queen's University school of business, said officials of the TMX didn't have much choice, given global consolidation, and Canadians should not fear the results.

"There is a massive wave of consolidations so mergers are unavoidable," he said. "Canadians shouldn't be too worried. This move won't reduce Canadian firms' access to the marketplace. It will make Toronto a more attractive exchange to list on. The proposed Toronto-London exchange would be the largest host of resource-based companies in the world."

TMX chief Thomas Kloet said today he's confident the deal will meet the "net benefit" test and that Ottawa will approve what he believes is a good deal for Canada. Does it even matter whether you call it a merger or takeover?

We are extremely sensitive in Canada, and as a small economy we should be, particularly after the loss of Inco, Falconbridge and many others. If you can kill an unpopular $40-billion takeover of Potash, you can kill a "merger of equals" whose popularity has yet to be tested.

NYSE, Deutsche Boerse in talks Just hours after the LSE-TMX deal was officially announced, two other major players disclosed they, too, are in advanced talks. NYSE Euronext and Deutsche Boerse said no deal has yet been reached.

NYSE chief Duncan Niederauer would be CEO, with Deutsche Boerse's CEO as chairman, and, as in the LSE-TMX deal, there will be co-headquarters.

NYSE Euronext is huge, operator of the New York Stock Exchange and bourses in Paris, Brussels, Lisbon and Amsterdam.

Corporate fight in works A corporate battle is brewing in Alberta, after TransAlta Corp. decided not to proceed with repairs to an important power plant, whose output has been purchased by TransCanada Corp. , The Globe and Mail's Nathan VanderKlippe reports today from Calgary.

In December, two power generating units - called Sundance 1 and 2, with a combined capacity of 560 megawatts - were taken offline for testing. In January, TransAlta determined the units were so corroded they could not be "economically repaired, replaced, rebuilt, or restored and that TransAlta therefore seeks to terminate the PPA in respect of those units."

Now, with TransAlta deciding not to return two units to service, TransCanada is already readying for a fight.

Enbridge Inc. will pour nearly $1-billion into First Nations communities affected by its controversial Northern Gateway pipeline, the company said today as it provided new detail on its efforts to win favour with both energy companies and British Columbia aboriginal groups.

In addition to a 10-per-cent equity stake, which it has offered to native groups along the route of its $5.5-billion project, Enbridge is pledging to put 1 per cent of pre-tax earnings into a community trust that is expected to receive $100-million over 30 years, The Globe and Mail's Nathan VanderKlippe reports from Calgary.

Agrium sees record quarter The commodities boom has helped drive Agrium Inc. to a record fourth quarter.

The agricultural products giant said today it earned $158-million (U.S.) or $1 a share, up markedly from $30-million or 19 cents a year earlier. Revenue climbed to $2.35-billion from $1.44-billion.

The Calgary-based company also ointed to what it expects will be a strong year going forward.

"Global crop prices and margins are expected to remain well above historic levels in 2011 as a result of very low global grain stocks, providing continued support for the entire crop input market," said chief executive officer Mike Wilson.

"North American nutrient inventories are tight and are expected to remain so as we move into the spring season."

WestJet posts profit surge WestJet Airlines Ltd. today posted a record fourth-quarter profit of $47.9-million or 33 cents a share, up sharply from $20.2-million or 14 cents a year earlier.

Revenue climbed to $692.8-million from $570-million.

B.C. consumers at risk Canadians are struggling with record debt loads, though not every province is equally at risk, The Globe and Mail's Tavia Grant reports today.

Households in British Columbia are most vulnerable to an unexpected economic shock like falling house prices, swift interest rate hikes or a surging jobless rate, says a paper by Toronto-Dominion Bank.

B.C. households most vulnerable to debt shocks

German exports climb German exports climbed in December for the second straight month, highlighting yet again how Europe's biggest economy is rebounding.

Exports rose 0.5 per cent from November, but compared to a year earlier were up strongly.

"Germany's trade surplus widened in December to €14-billion (seasonally adjusted) from €11.9-billion in November, beating expectations for a milder expansion," said economists at Scotia Capital. "Powering the economic recovery in the euro zone, exports gained 18.5 per cent on a year-over-year basis. Imports fell in the month, though remain up 20 per cent for 2010 as a whole. The news was interpreted as modestly supportive of the euro against the continued threat of sovereign debt concerns in the periphery."

Goldcorp sells Osisko stake Goldcorp Inc. has sold off its 10-per-cent stake in Osisko Mining Corp. for about $530-million.

The gold producer said today the money from the sale of its 38.6 million shares will be used to fund existing pipelines, and help the company maintain its "investment grade" balance sheet.

"The sale of our investment in Osisko highlights Goldcorp's continued success in redeploying internal capital from non-core assets to fund our leading growth profile," said chief executive officer Chuck Jeannes.

Tim Kiladze's Morning Meeting In a quick analysis that came out before details of the deal were released today, the Financial Times took a shot at the TMX-LSE merger, Streetwise columnist Tim Kiladze reports.

In Personal Finance today Mortgage poll shows Canadians are hearing the message about paying down debt faster.

Our vision of retirement is rapidly changing. Find out the pros and cons of being employed for life.

In this week's Cash Clash, a high-net-worth couple seek advice on whether they can afford to live a little.

From today's Report on Business

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Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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