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TMX Group Inc. (X-T), operator of the Toronto Stock Exchange, reported a drop in quarterly profit on Friday, hit by a substantial charge related to an imminent $3.8-billion takeover by the Maple Group consortium of financial institutions.
Maple, a consortium of 12 big banks, pension funds and insurers, recently won approvals from provincial regulators and the federal Competition Bureau to buy TMX. Maple will put TMX and TMX's biggest domestic rival, Alpha Group, under the same umbrella along with clearing house Canadian Depository for Securities Ltd.
A $54.4-million charge for the Maple deal pulled down TMX net income in the second quarter to $1.8 million, or 2 cents a share. That compares with income of $54.7 million, or 73 cents, a year earlier.
The charge included a $29 million break fee due to the London Stock Exchange -- with which TMX had agreed on a takeover deal before Maple intervened -- and $23.4 million in legal, advisory and other costs.
"Put simply these are the costs associated with successfully reaching the finish line with Maple, which we expect to do on July 31," TMX chief executive Tom Kloet told a conference call with analysts.
"The Maple transaction delivers value to shareholders, while positioning TMX Group for future growth."
Excluding Maple-related charges and other one-time items, earnings dropped to 81 cents a share from 94 cents, excluding special items, in the year-before quarter.
Revenue fell 1 percent to $167.5 million, reflecting lower revenue from new listings, financings and equity trading due to a rocky global economic recovery, the company said.
TMX urged shareholders to tender their shares to Maple ahead of the July 31 bid deadline. TMX agreed to back Maple's bid last October, after initially rejecting the unsolicited offer that was put together to foil TMX's friendly deal with the London Stock Exchange.
Maple has touted its proposal as the best way to keep Canadian exchanges out of foreign hands, while ensuring that Toronto is able to maintain its status as a financial hub.
TMX said it expects to incur a one-time cost of $24 million to achieve annual cost savings from the Maple deal. Those annual cost savings are expected to be about $20 million beginning in early 2014.
TMX also runs TSX Venture Exchange for small-capitalization stocks and the Montreal Exchange for derivatives, among other markets.
ROCKY GLOBAL RECOVERY
Weakness in equity markets was largely due to uncertainty about Europe's debt crisis and its impact on global economic growth, which has battered the Toronto Stock Exchange (TSX).
Volumes on the TSX and the Venture Exchange sank 17 percent and 41 percent, respectively, in the quarter. Kloet said total capital raised on the exchanges was down 28 percent from a year earlier, while financings were also hit hard.
But weakness in equity markets was partly offset by higher trading volume on TMX's energy market -- the Natural Gas Exchange -- and increased revenue from options and derivatives trading and clearing platforms such as the Montreal Exchange, Boston Options Exchange and the Canadian Derivatives Clearing Corp (CDCC).
TMX said on Friday it is looking at a number of opportunities to expand its business, both within and outside of Canada.
Many market observers say the Maple takeover opens the door to a bigger role for the enlarged entity in the global exchange industry, with expanding into U.S. markets apparently first on the agenda. According to sources, TMX is in talks to buy Direct Edge Holdings LLC, the No. 4 U.S. stock exchange.
"On the one hand, I think they are a logical acquirer in that they have a dominant and complete market position in Canada. It's logical they'd be looking to press out of the their borders, particularly in the United States," said Ed Ditmire, an analyst at Macquarie Securities in New York.
"On the other hand, the thought of doing three simultaneous acquisitions and integrations is a full plate for any company. So we would have some concerns about the whether or not the execution of all these might suffer from the crowded agenda."