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The year-long battle for control of the Toronto Stock Exchange appeared to be coming to an end on Thursday after Maple Group said it would accept a regulator's conditions on its $3.8-billion bid for TMX Group (X-T).
Maple, a consortium of Canada's largest banks, insurers and pension managers, said it would comply with terms set forth by the Ontario Securities Commission if they survive a 30-day comment period. Its agreement clears the way for a deal that will give Maple-TMX some 85 percent of Canadian stock trades.
"We now place high odds of success for the deal, versus 50-50 just a week ago," Cormack Securities analyst Jeff Fenwick said in a note.
Luc Bertrand, Maple's main spokesman, said in an interview that he was hopeful of completing the transaction by July 31. Earlier this week Maple extended its offer to the end of July, the seventh time it has done so since its offer surfaced a year ago.
TMX shares rose on Thursday, bringing them closer to Maple's $50 bid price than at any time since the bid was launched last May.
In a 164-page document, the OSC made clear it was concerned about the transparency of the new exchange. It said it was seeking controls on governance, including restrictions on the make-up of the board of directors and limits on ownership to ensure the new stock exchange operator acts in the public interest.
The OSC wants diverse board representation at the new entity, and a commitment that no entity can own more than 10 percent of Maple voting shares without the regulator's prior approval.
The terms and conditions provide for a pricing model that would force Maple to give users of the country's clearinghouse for stocks an equal cut of profits over and above baseline revenues of 2012, trimming Maple's expected profit.
"The commission has thoroughly reviewed the regulatory issues raised by Maple's proposal and developed measures necessary to ensure that the public interest is protected," OSC chair Howard Wetston said in a statement.
"We're cautiously optimistic that a lot of concerns we and the industry might've articulated are being listened to. The devil here is definitely in the detail," said Nick Thadaney, chief executive of the Canadian arm of research broker ITG.
The Competition Bureau, an independent federal agency, said the OSC's draft rules might "substantially" mitigate its concerns regarding the Maple bid, and it would now seek industry reaction to the OSC terms.
As part of its proposal, Maple wants to fold under TMX's wing Alpha Group, TMX's biggest domestic competitor in stock trading, as well as CDS, which clears and settles all trades in Canada.
But the fact that Alpha and TMX control some 85 percent of all stock trades in Canada raised concerns that the deal would give too much power to a single market and clearing operator controlled by the country's big financial institutions, including TD Securities Inc. and Caisse de depot et placement du Quebec.
The OSC draft rules cover the operation of TMX and CDS, but not Alpha. But the regulator said if Maple completes its proposed takeover of Alpha, the regulation order for that exchange would mirror the one for the TMX-CDS entity.
Billionaire investor Stephen Jarislowsky said the market saw the latest news as moving the deal closer to completion.
"I think that the thing is getting more momentum," said Jarislowsky, who is chief executive of Jarislowsky Fraser Ltd.
"I think everybody is now intent on doing something and is feeling it has to be done in a relatively rapid time, and not let it drag much longer."
Analysts at Macquarie said the conditions imposed by the OSC don't appear to affect the economics of the deal materially.
"If the combination were closed today, we see $48.30-$49.80 in value per share," they wrote in a report.
Maple's banks, insurers and pension fund managers launched their complicated bid almost a year ago to counter the London Stock Exchange's friendly offer to buy TMX.
Wrapping itself in the Maple Leaf flag whose name it carried, Maple had argued that a made-in-Canada solution was in the country's best interest in the face of the LSE bid.
A back-and-forth bidding war and heightened rhetoric about nationalism eventually scuttled the LSE proposal, leaving Maple as the sole bidder for Canada's largest stock exchange operator -- but facing massive conflict-of-interest concerns.
In addition to formal approval from the Competition Bureau, the deal still requires the nod of securities commissions of British Columbia and Alberta. The two provinces are set to publish notices soon.
Quebec's Autorite des marches financiers, which has already said it intends to approve the deal, on Thursday issued a separate notice and promised additional consultations about Maple's desire to wrap the Canadian Depository for Securities stock clearing system into the new entity.
The OSC's terms and conditions -- which follow hearings held late last year -- l aid out a new pricing model to ensure Maple cannot turn the monopoly CDS clearinghouse for stocks from a non-profit utility into a cash cow.
Non-Maple users of the CDS had worried about paying more to use the system. The pricing rules require Maple to split any revenue increases on CDS services with participants on a 50-50 basis beginning in November, a change Maple's Bertrand accepted.
"We've taken the spirit of how CDS conducted its affairs in the past and I think we've even gone further and expanded that by including the fact that we would be sharing parts of the synergies with participants," said Bertrand, who is also vice-chairman of National Bank Financial.