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Maple bid for TMX not a sure thing

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Canada’s largest exchange operator, the TMX Group (X-T), is down to one suitor after the London Stock Exchange Group abandoned its proposed takeover of the company. But the remaining offer from Maple Group—a consortium of Canada’s largest banks and pension funds—faces significant risks, one analyst said in a report to clients on Thursday.

“We continue to have concerns with the Maple offer and believe there is a significant probability of the deal ultimately falling apart,” Jeff Fenwick of Cormark Securities said.

Fenwick believes the high level of debt the Maple Group is proposing as part of its offer may impede the new company’s “financial and strategic flexibility.” He raises particular concern over the OTC derivatives clearinghouse, as some counterparties may be restricted by new capital rules from clearing through a central counterparty with a low rating.

Fenwick also says the competition fears—which have been dismissed by Maple Group Spokesperson Luc Bertrand—are real and should be addressed.

“Despite rhetoric by Luc Bertrand, the CEO of Maple, downplaying competition concerns by highlighting that more than 50 percent of cross-listed securities trade in the U.S., we note that the vast majority of issuers (more than 6,000) are solely listed in Canada and for them, the proposed group will control over 80 percent of trading volume,” Fenwick writes in the report.

Despite his concerns, Fenwick raised his outlook for TMX Group to “market perform” from “reduce”—and increased his target price to $47 from $44 based on the possibility the Maple deal could succeed.

TMX FOCUSED ON GROWTH

TMX Group Chief Executive Tom Kloet said Thursday that the firm was not in any kind of takeover talks at present and was focusing on growth.
    
"We're not in any of those discussions right now, but the reality is that one never knows what will happen," Kloet told journalists after a shareholder meeting.
    
"We've been very committed to a deal with the LSE Group and we've not been flirting elsewhere so to speak."
    
"Make no mistake ... we will absolutely continue to grow internationally," Kloet told shareholders at a meeting originally called in part to vote on the LSE proposal.
    
"We will grow our investment tools available to our issuers, and we will expand our international footprint, steadily and carefully."
    
Few believe the TMX can afford to stand still as global exchanges race to grow their product bases and broaden their geographic reach, or risk being swallowed up by a rival or losing ground to new market entrants.

MAPLE STRIKES FRIENDLY TONE

The Maple Group consortium of Canadian banks and pension funds said Thursday it would like to proceed with a takeover of TMX Group on a friendlier note.
    
"Nobody is looking at this and saying 'Okay, now lets pack up our tent and go home'," a source with the 13-member consortium said on Thursday.
    
"We would like to turn this friendly. We'd like to figure out how we get the TMX to say, 'You know, we want to do this with you,' because we are in a much easier position to move on the regulatory fronts with a party that wants to do a deal."
    
Created in May in the back of a taxi by bankers who wanted to block the transatlantic merger plans of the LSE and TMX, the Maple Group is grappling with identity issues now that it has been successful in scuttling the rival London deal.
    
MAKING THE REGULATORS HAPPY
    
Maple's bid faces significant antitrust concerns because it would create a system in which major market players run the exchanges on which they did their deals.
    
The chief concern centers on Maple's plan to fold Alpha Group, Canada's biggest alternative trading system, into the post-takeover TMX. The combination would give the TMX-Maple entity more than 80 percent of Canada's stock-trading market.
    
Analysts are now scratching their heads over what regulators may demand Maple do to make the merger acceptable.
    
"Alpha will certainly create problems, but let's face it, the consolidation of trading entities around the world works in their favor," said Rick Powers, a professor at the University of Toronto's Rotman School of Management.
    
"The competition bureau will certainly put controls in there, and require them to do certain things if they are going to approve it, but I think that's all negotiable."
    
The source at Maple agreed, saying the group can waive its condition of acquiring Alpha to get the deal closed, and then deal with the alternative exchange later. A significant number of Maple Group investors are also investors in Alpha, and the cross-ownership gives the group leverage at the same time as it raises competition concerns.
    
One of the group's next steps may be bring Canada's biggest bank, Royal Bank of Canada, into the fold, now that its advisory role with the LSE is over.
    
"We would be quite happy if they wanted to participate in the Maple consortium ...  because at the end of the day the more participants that we can have, the stronger the bid is," the Maple source said.
    
RBC and Bank of Montreal had been the only two of Canada's big six banks to be left out when Maple members teamed up to defeat the LSE-TMX alliance, sidelined because their capital markets teams were advising the deal.
    
BMO is still advising TMX management and cannot join Maple unless and until the deal becomes a friendly merger.
    
While RBC and BMO declined to comment on the possibility of joining the consortium, the Maple source said he expects discussions to begin with RBC after everyone takes a breather over the weekend, which begins with the Canada Day national holiday on Friday.
    
"Nobody's going anywhere. TMX has ... to reflect a bit, and then Friday is a holiday. We'll pick things up again on Monday."

With files from Reuters

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