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TMX takeover reopens net benefit debate

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The Toronto Stock Exchange and the London Stock Exchange are seeking to merge to create the world's eighth-largest exchange operator, a transaction that is likely to rekindle the debate about whether Canada is willing to let go of strategic assets.

The deal to put together TMX Group Inc. (X-T) and London Stock Exchange Group PLC, officially announced early Wednesday, comes as Canada attempts to build its stature as a financial centre based on its strong banks and an abundance of natural resources that are in huge global demand. The deal would bring together two of the world's biggest exchanges for mining stocks to create a global leader in mining and resource financing.

The merger also presents governments in Ottawa, Toronto and Quebec with a transaction that promises to be controversial because of the TMX Group's central role in Canada's financial markets. It is almost certain to provoke further discussion about foreign mergers after last year's takeover battle for Potash Corp. of Saskatchewan.

The proposed TMX-LSE transaction is structured as a merger of equals, but some key levers of control would shift outside Canada. LSE shareholders would end up owning more than half of the combined company, and the LSE's chief executive, Xavier Rolet, is expected to be the head.

The government expects to review any deal that materializes. "TMX Group has announced it is in advanced discussions regarding a possible merger with London Stock Exchange Group," Industry Minister Tony Clement said in a statement.

"Should these discussions result in a concrete investment proposal, I and my officials will look at how the Investment Canada Act applies."

Ottawa turned down an Australian company's hostile takeover bid for PotashCorp, citing a lack of net benefit to Canada, and may have a similar say in any TMX deal under Investment Canada rules. The provincial governments of Ontario and Quebec also hold significant sway over the TMX's future because they have to approve purchases of more than 10 percent of the company's shares by any single investor, and because they regulate some of the company's key marketplaces. It is not clear that this deal would require their approval.

Many developed countries have allowed their exchange operators to be merged into larger, transnational corporations as the business of running stock markets has become more global. The main stock markets in France, the Netherlands and Belgium are now allied with the New York Stock Exchange as part of NYSE Euronext. Similarly, the Nasdaq market in the United States now owns many exchanges in northern Europe. Australia is debating whether to allow its stock market operator to join with Singapore's.

Exchange operators have sought out mergers to gain market share in trading securities and provide services to public companies, and in the belief that size will make the large investments in technology they need more affordable.

If consummated and approved, the TMX-LSE deal would unite two exchanges that list some of the world's largest mining companies. London lists producers like Rio Tinto and BHP Billiton, while Toronto is the home market for large players such as Barrick Gold and Teck Resources. The combined market value of LSE and TMX would be about $6.9 billion.

"This a natural evolution of global capital markets," said Tye Burt, chief executive officer of Kinross Gold Corp., one of Canada's largest gold miners. "From a global and Canadian mining perspective, it appears to be a positive development, as it brings together the world's two leading capital markets for mining, and has the potential to give Canadian-based mining companies greater exposure to European investors."

TMX said head offices of the merged entity would be in both London and Toronto, and top executives from each would land in senior roles.

Nonetheless, the deal is likely to be a flashpoint, given Canada's national angst about losing strategic assets, and coming as it does after the federal government's decision last fall to block BHP Billiton's attempt to buy Potash Corp. of Saskatchewan last year.

Representatives of the Ontario and Quebec governments, where the TMX Group's derivatives operations are based, declined to comment.

TMX Group is at the heart of much of Canadian finance, with operations that touch many provinces. It owns the Toronto-based TSX, where the biggest companies in Canada trade, as well as the Calgary-based TSX Venture exchange for smaller companies. About 70 percent of all Canadian stock trading takes place on its markets.

TMX has expanded beyond just stocks in the past decade, and now owns energy trading markets in Alberta and the Montreal Exchange derivatives business in Quebec.

However, the company is running out of growth options at home. It also faces serious competition in its key business of stock trading from upstart markets, and needs to find new ways to expand.

It's not a problem limited to Canadian exchanges - the LSE faces similar issues, as do most other incumbent exchange operators. As a result there has been a wave of international stock-market mergers over the past decade. However, until now, TMX has stayed out of it while rivals in other countries made their moves.

"It's become a global industry," said Tony Demarin, president of BCV Asset Management in Winnipeg. "The large are going to continue to get larger. This will probably be one of many mergers around the world. When the smoke clears a number years from now, we might have handful of super exchanges that are linked together."

Charles Phillips, CEO of Armtec Infrastructure Inc., a Guelph, Ont., maker of pipe, noise barriers and construction products, said the merger of the exchanges should be good news for companies listed on the TSX. The deal could make it easier to raise capital, he added. "If people in other parts of the world get a better understanding of companies like ours that operate in Canada, that would be a good thing."

Others predicted the deal could enhance, rather than detract from, Canada's place in international finance. "Even though the TSX is a world leader in mine financings for example, it can be a struggle for the TSX to maintain a strong international profile," Ken Weiner, a former TSX official who is now a corporate lawyer with Goodmans LLP. "The Canadian market is not a large one by international standards and a connection to a world leading market like London would be a boost for the TSX."

With reports from the Globe and Mail's Brenda Bouw in Vancouver, Steven Chase in Ottawa, and John Heinzl, Richard Blackwell and Jacquie McNish in Toronto.

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