TSX MX Merger
Posted on September 4, 2007
Filed Under Stocks |
A group of big U.S. and Canadian institutional shareholders is mobilizing to push for the merger of TSX Group Inc. and Montreal Exchange Inc., a deal that the companies have been unable to consummate despite serious talks this summer.
The exchanges have publicly trod increasingly separate paths this year, signing up high-powered U.S. allies and getting set to compete head-on when an agreement giving the MX sole possession of Canada’s derivatives market lapses in early 2009.
In private, there have been high-level talks in recent months, with top officials at the two companies going so far as to discuss who would run a combined company and who would be chairman.
Sources said MX chief executive officer Luc Bertrand recently broached the idea and TSX CEO Richard Nesbitt is not unwilling to consider a combination, but there appears to be resistance at the board level for reasons that are unclear.
The shareholder group that met by phone yesterday believes a combination of Canada’s two exchange companies is something that should happen, or each company will ultimately become a target on its own, Mr. Caldwell said yesterday.
“I’m of the opinion that Toronto and Montreal have to think in those terms, because if they don’t, they’ll be taken out individually,” he predicted.
“I don’t know if they’ve got to lock their key people in a room and say ‘Don’t come out until you’ve got a deal done.’… If it doesn’t happen, it will be a real mess.”
The rationale for a combination is that investors will be able to trade Canadian stocks and derivatives at the same exchange, leading to increased volumes and cost savings. If TSX and MX don’t get together, there’s concern among some investors that the derivatives market isn’t big enough for two and the fighting will leave both companies weakened and vulnerable.
Mr. Nesbitt and Mr. Bertrand declined to comment on any discussions, as did spokesmen from each of the companies.
Sources said the latest talks, which took place in summer, included at least one face-to-face meeting that included Mr. Nesbitt, Mr. Bertrand and senior representatives of each company’s board.
But nothing was sealed, and sources say Mr. Bertrand has since expressed frustration about his inability to get the TSX onside.
By the end of July, with no deal imminent, the TSX launched a share buyback that could consume almost all of the $370-million in cash that the company had stockpiled for a potential acquisition. However, Mr. Nesbitt said at the time he wasn’t giving up on making purchases and that if any potential deal arose, the TSX could borrow or use shares to pay.
The MX has a market value of about $933-million after a slump in recent months amid slower-than-expected growth. TSX is three times the size, but on price-to-earnings basis, its shares are not as highly valued, making the economics of a deal now difficult to swallow for the TSX.
Sources familiar with the TSX board’s thinking say the company may play a waiting game, betting that the TSX and its partner, U.S. options powerhouse International Securities Exchange Holdings Inc., can steal significant share from Montreal in derivatives in 2009. That would likely lead to a big drop in Montreal’s share price. “Without that business, it’s worth a fraction of the price,” said one source familiar with the situation.
Financial, timing and personality issues are not the only concerns. Both companies have restrictions that prevent takeovers without the approval of financial regulators in their home provinces, but the real decision is widely believed to rest with the provincial governments.
That means any deal must be friendly, and must maintain significant control in Montreal. The TSX has made overtures on that front, placing the executive in charge of its listings business in Montreal and holding meetings there.
Some of the overtures haven’t been well received, however. When last year Mr. Nesbitt pledged that Montreal would be a “centre of excellence in derivatives” after any combination, Mr. Bertrand responded acidly: “We’ve been here for a long time. I don’t need someone from somewhere else to tell me I could remain a centre of excellence.”
Mr. Caldwell took pains to insist that the shareholder group doesn’t want to add to any antagonism. He said no one is looking to strong-arm the exchanges into anything. Instead, he said he hopes to have constructive discussions with some exchange directors next month.
“They know that people want to see this happen,” he said, stressing both companies have a duty to put “principles ahead of personalities.”
–Globe and Mail, Aug 31/07
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