UPDATE: Independent Adviser Says LSE-TMX Deal "Superior"
18 June 2011 - 1:34AM
Dow Jones News
Glass Lewis & Co, an independent adviser to institutions,
has recommended that shareholders vote for a merger between
Canadian exchange operator TMX Group Inc. (X.T) and U.K. peer the
London Stock Exchange Group PLC (LSE.LN), judging it as "superior"
to Maple Group Acquisition Corp.'s counter takeover bid.
The adviser said its recommendation was a result of the
"strategic merit" of the proposed transatlantic tie-up with LSE, as
"the rapidly consolidating exchange industry has all but forced
companies to combine in order to compete."
However, Maple quickly retorted, saying that Glass Lewis'
conclusion and part of the analysis in its report is "deeply
flawed."
The report from Glass Lewis is especially significant because
the adviser is an indirect wholly owned subsidiary of Ontario
Teachers' Pension Plan Board, one of the key founders and backers
of Maple.
Glass Lewis says on its website that it maintains its
independence from OTPP by excluding OTPP from any involvement in
the making of Glass Lewis' proxy voting policies and vote
recommendations.
Maple's bid is meant to upset a merger deal struck between TMX
and LSE in February. TMX and LSE shareholders are due to vote on
the deal later this month. TMX needs a two-thirds vote and the LSE
needs a majority vote to carry on with the deal.
Glass Lewis said it recognized "complementary business lines"
between TMX and the LSE and relied on their "projections of revenue
and cost synergies." The adviser added that it thought "LSE's
proposal is superior to Maple's competing offer for TMX" and "the
proposed merger... is in the best interest of shareholders."
The value of the LSE-TMX deal is around C$47 a share, based on
current share prices.
Glass Lewis said the LSE-TMX merger is "reasonable" and that the
combination of the strong brands of TMX and the LSE will result in
"a larger, financially stronger company with increased scale and
reach."
As part of Maple's counterbid, it plans to merge TMX with Alpha
Group, an alternative-trading platform owned by Canada's big banks,
and with CDS Inc., Canada's equity and fixed-income clearing
house.
Glass Lewis said Maple's plan is "unconventional" and would rely
on increasing debt financing, which means TMX's debt levels would
rise to about 2.9 times earnings before interest, tax,
depreciation, and amortisation of goodwill, up from 1.1 times
currently. It could rise further to 4 times Ebitda with the
purchase of Alpha and CDS.
"One of the largest unknowns is whether or not Canadian
regulators would approve Maple's combination from a competition
standpoint," Glass Lewis said.
It is estimated that combining TMX with Alpha would give Maple
around 90% markets share in Canadian equities-trading volume.
Glass Lewis said an LSE-TMX merger "is by no means a sure thing"
but it "has a greater probability of obtaining all necessary
approvals."
Among its arguments against the report, Maple said that Glass
Lewis "does not mention, and appears to give no weight to, the
extraordinary condition of the LSE offer which requires provincial
securities regulators in Quebec and Ontario to abandon a key
Canadian public interest protection limiting any one shareholder
from owning more than 10% of TMX Group."
Maple said the report didn't mention Quebec Premier Jean
Charest's recent comments to the media, with him saying: "We would
much prefer to see ownership in the hands of the Maple Group."
Maple said Glass Lewis "appears to ignore" recent information
that even after supposedly being bought by Maple, TMX "would
continue to have an investment grade profile and would have the
cash flow and capacity to de-lever to 2 times Ebitda within two
years."
A combined LSE-TMX board will have seven TMX directors and eight
LSE directors.
Maple said Glass Lewis didn't say in its report that "the
assurances of TMX board representation largely expire after four
years."
On Tuesday, Maple received approvals from Canada's securities
regulators to structure its takeover bid as a two-step process. The
approvals allow Maple to initially acquire 70% of TMX's shares for
C$48 each in cash, and then acquire the remaining 30% by exchanging
each TMX share for one Maple share. TMX shareholders would own 40%
of the resulting public company.
Earlier Friday, Canada's Globe and Mail newspaper quoted LSE
Chief Executive Office Xavier Rolet as saying the exchange was
"reviewing" its bid for TMX amid speculation that a sweeter offer
will be needed to gain support from shareholders. However, a person
familiar with the matter said that this was merely part of a
constant review given the two competing offers.
Maple is urging TMX shareholders to vote against the proposed
LSE transatlantic tie-up. It plans to pursue the combination of TMX
with Alpha Group, an alternative-trading platform owned by Canada's
big banks, and Canada's equities clearinghouse as soon as possible
following the acquisition of TMX.
However, TMX's board has opposed Maple's bid as not offering
enough of a takeover premium. It also believes the deal will saddle
TMX with too much debt. TMX and LSE say their proposed tie-up is
superior since it gives the two exchanges global stature amid a
wave of consolidation among exchanges.
At 1500 GMT, LSE shares were up 0.8% at 947 pence, giving the
company a market capitalization of just over GBP2.55 billion, in an
overall higher market.
-By Michael Haddon, Dow Jones Newswires; 4420-7842-9289;
michael.haddon@dowjones.com
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