The London Stock Exchange will find itself in a tight spot trying to fend off a rival bid for Canada's TMX Group, a deal it badly needs to rejuvenate its centuries-year old business.
If LSE boss Xavier Rolet were to better his terms, it would undermine any claim that the LSE and TMX are equal merger partners in the $3 billion deal, something he has stressed in the past to soothe nationalist nerves in Canada.
If the LSE puts cash in, or takes a stake in TMX, it feels less like a merger of equals. That is a red flag for regulators, said a banker familiar with the transaction, speaking on the condition of anonymity.
The bid by the Maple Group -- whose name invokes the nation's most patriotic symbol in the maple leaf -- are better than those of the LSE, with the Canadian group takeover proposal valuing TMX at C$3.6 billion, or C$48 per share.
Rolet took the helm at the LSE in 2009 and much of his reputation may depend on the takeover of TMX, his most ambitious bid to secure future growth and fight off upstart rivals that have rapidly reduced its market share.
A consortium of leading Canadian banks and pension funds has approached TMX over a cash and equity bid, the operator of the Toronto Stock Exchange said on Saturday.
If the LSE's all-share merger with TMX goes through, the British group would be the dominant party, with its stockholders controlling 55 percent of the new company, so the friendly bid has met a wary reception in Canada.
The group includes four of Canada's largest banks -- Toronto Dominion Bank, National Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Nova Scotia.
It also includes Canada's largest pension funds from the provinces of Ontario, Quebec and Alberta. Canada's two other largest banks, Bank of Montreal and Royal Bank of Canada, are advisers in the LSE-TMX deal, and support it.
With a large chunk of the Canadian dealers behind a competing offer, it presents London with a serious challenge. It would be hugely embarrassing for Xavier (Rolet) if the deal did not happen, the first banker said.
The TMX deal is crucial for the LSE at a time when most of its largest rivals are working on deals themselves. The British group could even look vulnerable itself as a target if the carefully planned deal falls through.
The collapse of the TMX deal would leave the LSE vulnerable. Everybody is partnering up and the LSE doesn't want to be left out there on their own, said Herbie Skeete, managing director of consultancy Mondo Visione. Deutsche Boerse is fighting with Nasdaq OMX and the IntercontinentalExchange, who are trying to derail its bid for NYSE Euronext, a deal that would rewrite the global exchange league tables.
Acquiring TMX will give the LSE broader regional coverage and access to TMX's stable of booming mining companies.
Fending off the Maple Group may well mean it tries to convince shareholders of the benefits of a merger between bourses -- not bourses and banks -- while at the same time quietly placating a host of regulators in Canada.
TMX shareholders will have to decide if pocketing cash outweighs the global (consolidation) story, said a person familiar with the matter, asking not to be named.
The LSE and TMX last week filed their formal merger application with regulators in Ontario, Quebec, Alberta and British Columbia, all of which must back the deal.
Privately, (the LSE's) advisers will be looking for remedies that will get the regulators more on side, the first banker said.
(Writing by Douwe Miedema; Additional reporting by Pav Jordan in Toronto; Editing by David Holmes and Richard Chang)