TORONTO Politics may trump the idea of globalization in deciding the fate of a proposed takeover of the TMX Group (X.TO), raising the spectre of a second foreign-backed deal blocked by Canada in a matter of months.
A complex, multi-tiered approval process starts on Wednesday when an all-party committee of the Ontario provincial legislature holds the first of four hearings on the takeover proposal from the London Stock Exchange (LSE.L).
Judging by strong criticism from the Ontario finance minister and from opposition politicians, the deal faces a rough ride in the hearing room.
The panel's report is non-binding, but it will likely carry weight when the Ontario Securities Commission opens its own independent review of the deal. The OSC can veto the transaction if it deems it to be outside "the public interest," a concept that is open to interpretation.
"It is a problem that it's vague because we don't know what they are looking at," said Alison Crosthwait, a global trading strategy analyst at Instinet who does not expect the deal to be approved as it currently stands.
Even if the deal gets past the OSC, it will have to pass muster with the federal government in a review that will only start when Industry Minister Tony Clement receives an application from the exchange.
Only four months ago Ottawa blocked BHP Billiton's $39 billion (23 billion pounds) takeover of Potash Corp, saying the Anglo-Australian miner's stewardship of the world's largest fertilizer maker would not benefit Canada.
Investors appear pessimistic about the fate of the LSE-TMX deal. Shares of TMX, the parent of the Toronto Stock Exchange, have traded below the price implied by the proposal since it was announced in early February, suggesting investors aren't convinced it will survive the gauntlet of reviews.
Employment is the No.1 issue for politicians, especially with fall elections scheduled in the province of Ontario, and the possibility of national elections as early as this spring.
"I would say there are definite political overtones to this," said Lawrence Booth, a finance professor at the University of Toronto's Rotman School of Management. "There are a lot of jobs tied up in Toronto -- direct brokerage jobs, the legal jobs."
Hundreds of thousands of Toronto jobs have links to the city's role as Canada's financial centre.
The weight of public opinion is crucial as the ruling Liberal Party trails the Progressive Conservatives in opinion polls ahead of the October election. But Ontario politicians on all sides have been united in criticism of the deal.
The tie-up also raises fears that Canada may lose some economic sovereignty if ownership of its largest stock exchange is based in London, rather than Toronto.
Those fears are particularly acute in the mining sector, where foreign firms have bought several large Canadian companies -- nickel miners Inco and Falconbridge and aluminium producer Alcan -- in the past five years.
The two exchanges tout the deal as a "merger of equals" co-headquartered in both London and Toronto. They have said the combined company could go on the offensive as competition intensifies internationally.
TMX Chief Executive Tom Kloet, who will testify on Wednesday, says the deal could also help the TMX's Montreal-based derivatives market compete globally in the profitable business.
OSC chairman Howard Wetston has said regulators will exercise "independent judgement" in evaluating the deal. But he has pledged to takes public comments -- including the legislative committee's -- into consideration.
Darryl Levitt, a lawyer specializing in mergers at Macleod Dixon in Toronto, said "popular noise" will likely influence the OSC.
"They can say that they will take an independent decision but they will be influenced practically," he said. "As much noise that can be made by either parties in favour or not will be highly relevant."
Our top photos from the past week.