TORONTO A shareholder vote on the London Stock Exchange's $3.5 billion (2.1 billion pounds) takeover bid for Canada's TMX Group (X.TO) is less than a month away, but investor Chris Damas still can't make up his mind. He's not alone.
Shareholders in the company that operates the Toronto Stock Exchange have yet to rally around either the LSE's (LSE.L) friendly bid or a hostile $3.7 billion offer from Maple Group Acquisition Corp, a consortium of Canadian banks and pension funds.
Like many of the shareholders who spoke with Reuters in a recent poll, Damas says he still has too many unanswered questions. The Barrie, Ontario-based equity analyst wants more details, particularly from Maple, before he can decide. A sweeter offer wouldn't hurt either.
"They both have a lot of warts," said Damas, who says he owns a significant number of TMX shares. "There seems to be a large amount of BS being publicly pushed in this drama."
With no consensus among TMX's fragmented shareholder group, the suitor with the best sales job is likely to come up the winner in a race that appears to be wide open.
Working the LSE corner is Tom Kloet, an American brought in to lead TMX in 2008 after the Toronto and Montreal exchanges merged. His LSE counterpart, Xavier Rolet, will reinforce a message that emphasizes the global power the proposed combination of the London and Toronto exchanges will yield.
Maple's public face is Luc Bertrand, a Montreal banker who once ran the Montreal Exchange but left after it was acquired by the Toronto Stock Exchange and renamed TMX Group.
He was once tipped for the top TMX job that went to Kloet. Bertrand champions his group's proposal as a home-grown solution that would preclude foreign influence over Canadian capital markets, a big concern of those opposing the LSE deal.
The history between Kloet and Bertrand adds a personal dimension to the takeover contest, which offers two starkly contrasting visions for the Canadian exchange operator.
LSE's bid would create a trans-atlantic exchange operator that's big on mining, energy and other resource listings. Proponents say it would save costs, gain global exposure and diversify revenue sources, but Canadian regulators may balk at a deal that puts London in control.
"If you look at all of the players involved and the initial reactions to the LSE bid and the initial reactions to the Maple bid, you get a sense that the government seems more OK with the Maple bid," said Mathieu Roy, of Louisbourg Investments Inc in Moncton, New Brunswick, which owns about 150,000 TMX shares.
Maple's proposal, which TMX rejected last month, would keep Canada's biggest exchange in Canadian hands. But an exchange run by many of its largest customers and controlling an overwhelming share of the market could face antitrust issues.
"It breeds an unhealthy scenario when the banks can be on both sides of a lot of trades," said Ryan Bushell of Leon Frazer & Associates, holder of 400,000 TMX shares. "It's not a criticism of the banks, but I think that too much power in one place can ultimately lead to some bad things."
Under the Maple proposal, TMX shareholders would own about 40 percent of the shares, pension funds about 35 percent and banks about 25 percent. With the LSE-TMX deal, LSE shareholders would own 55 percent and TMX would own 45 percent.
Maple also plans to integrate Canada's biggest alternative trading system, Alpha Group, which is owned by many of the same Canadian banks and pension funds, into the new company.
The TMX drama is one of several exchange deals in the spotlight this year, as operators seek consolidation in the face of rising competition. The common thread is a desire to boost their global footprint and broaden their offerings.
SPLIT DOWN THE MIDDLE
Shareholders vote on LSE's proposal on June 30, but the result is far from clear. Of nine top investors polled by Reuters last week, four were still undecided. Of the five with a preference, two favoured the LSE and two the Maple bid. One wanted no change.
Those that were undecided said that Maple's proposal raised too many questions, and some said both bids were too low.
Leon Frazer's Bushell said TMX was better off on its own in the long run, and he said TMX's dividend stream and its ability to keep paying means both bids are undervalued.
The nine shareholders surveyed hold roughly 4.3 percent of TMX shares. More than 125 shareholders were contacted, but most declined to participate in the survey.
The survey did not include shareholders who recently sold their TMX holdings or who are directly involved in the deals. The four banks and five pension fund administrators making up the Maple Group hold just under 10 percent of TMX shares.
Shareholder response from Quebec -- home to TMX's Montreal derivatives exchange and Maple members Caisse de Depot et Placement du Quebec and Fonds de solidarite des travailleurs du Quebec (F.T.Q.) -- has been especially positive to the Maple offer, said a Maple source with knowledge of the deal.
Quebec may prove crucial to the Maple deal's success or failure -- it is perhaps no coincidence that Bertrand, the well connected insider and vice-chairman of Quebec-based National Bank of Canada, is Maple's chief spokesman.
Quebec's security regulator, which has the power to block either deal, holds hearings on the LSE/TMX deal in July.
TMX, for its part, has said that many of its biggest shareholders support the tie up with LSE.
"When you have the biggest traders in a very small cartel controlling the market environment, that can be extremely destructive," said Thomas Caldwell, a high-profile and vocal TMX shareholder.
Over the last 15 years, many of the world's top exchanges began floating shares in a "demutualization" process that transformed them into competitive, profit-making entities while allowing their traditional seatholders to cash in.
Maple's bid is a creative form of "remutualization," where the exchange's users regain control. They are effectively "turning back the clock," one shareholder said.
Maple's headline offer of C$48 a share, comprising C$33.52 in cash plus 0.3016 of a Maple share for each TMX share, appears superior to the LSE's all-stock bid. But some investors have expressed concern over the lack of clarity on valuations.
Maple's bid hinges partly on regulatory approval of the acquisition of Alpha and the CDS stock trade clearinghouse.
"They're going to offer you shares in a company which is going to buy two other companies, which people who own Maple already own, at a price that they did not tell you," said one investor whose firm owns several hundred thousand shares.
"So you don't know whether they are going to pay C$1 billion, as the LSE suggests, for Alpha, or C$150 million."
Shareholders will watch Maple's circular for details on the value of the shares that Maple is offering, and on valuations for Alpha and CDS.
Alpha currently has a market share of just under 20 percent, so a combination of it and the TMX would give Maple more than 80 percent of the market, boosting monopoly fears.
The market share of TMX's Toronto Stock Exchange and the TSX Venture Exchange eroded to just under 65 percent in the first quarter of 2011 from around 99 percent in 2007.
"Maple can never happen. It would eradicate competition in listings, equity trading, derivatives, data, clearing and face extraordinary barriers to competition bureau approval," LSE Executive Director David Lester told Reuters last week.
One undecided investor, who owns more than 1 million TMX shares, said there were strong long-term merits to both deals.
"TMX is potentially trading at a significant discount to the ultimate intrinsic value," the firm's director of equity research said. "There's still room for both parties to sweeten their offers in our opinion."
TMX shares have climbed more than 10 percent since the LSE and Maple announcements, but at under C$45 a share, the stock is still below Maple's bid. LSE shares have climbed nearly 9 percent to around 970 pence since the bid was made.
The $3.5 billion value of the LSE bid for TMX is based on Friday's closing price for LSE shares.