Canada's competition regulator has serious concerns about a C$3.8 billion (2.4 billion pound) proposal to take over TMX Group
Maple Group's bid would unite the Toronto Stock Exchange and the TSX Venture Exchange for small-cap stocks with their largest competitor, Alpha Group, a so-called alternative trading system. Maple is also seeking to put the exchanges under the same umbrella as CDS, which clears and settles all trades in Canada.
The Competition Bureau's main concerns are the impact the proposal would have on equities trading as well as clearing and settlement services. The news pushed TMX shares down 2.8 percent by midday on Wednesday.
A source close to the deal said the regulator's concerns did not mean the merger plan was dead. Still TMX and Maple - a consortium of 13 Canadian financial institutions - would have to make concessions for the watchdog to bless the deal.
This is not a deal breaker, said the source, who was not authorized to speak on the record. But it tilts the scales against the deal in a way it did not a month ago.
The TMX deal is one of a wave of proposed acquisitions in the exchange industry as bourses seek to gain scale in a bid to reduce costs. Competition concerns have emerged as a hurdle in other jurisdictions as well.
Earlier this month, Deutsche Boerse
Possible concessions the Competition Bureau might exact from Maple could revolve around greater powers to the Ontario Securities Commission to regulate. The body may also place controls on trading fees to ease concerns about pricing.
That said, Maple has already said that regulatory approval of its acquisition of Alpha and CDS is a necessary condition for the overall takeover deal, which it argues will benefit Canada's capital markets.
In addition to federal approval, the C$50-a-share bid needs the blessing of the powerful securities commissions of Quebec and Ontario, as well as two other provincial watchdogs.
The Competition Bureau's concerns come just a day ahead of what are shaping up to be intense public hearings before the country's most powerful provincial regulator, the Ontario Securities Commission.
The competition watchdog's concerns came as a surprise to the consortium. Maple had said only last week that it was confident the deal would win approval after the first public hearings, staged by regulators in Quebec.
According to the TMX-Maple statement, Competition Commissioner Melanie Aitken has not reached a final conclusion. Changes to the regulatory regime, as well as certain commitments by the parties involved or other remedial measures, might sway her opinion, the two sides said.
Maple and TMX said they intend to keep working closely with authorities to address the commissioner's concerns.
DEAL IN SOME JEOPARDY
The main sticking point lies in the plan to unite TMX's exchanges with Alpha, Canada's biggest alternative trading system. Together that would give TMX-Maple control of more than 80 percent of all Canadian stock trading.
I interpret the commissioner's comment about 'equities trading,' as being broad and not just Alpha-related, said Chris Damas, an independent analyst and long-time TMX shareholder.
Damas, who recently sold his TMX shares partly in anticipation of objections that regulators might raise, said he expects the bureau to review the matter for at least another 30 days.
This puts this deal is some jeopardy, he said. It's a cryptic comment. It's not a judgment.
Another big concern centres on Maple's plan to bring into its fold the country's non-profit national clearing and settlement shop, the Canadian Depository for Securities. Critics says that would lead the monopoly control over fees.
It is very important that the clearing mechanism be open and accessible on a competitive price basis to all brokers. And to my mind that's the choke point - that's the one they're concerned about, said Thomas Caldwell, a TMX shareholder and a one-time prominent opponent of the Maple bid.
Maple has indicated it would extend its offer beyond the January 31 deadline if it has not received all regulatory approvals by then.
Shares of TMX were down C$1.27 at C$43.48 in afternoon trading on Wednesday. Early trading in TMX's stock and many others was hit by technical problems at the Toronto Stock Exchange. The glitch was unrelated to developments surrounding the acquisition.
(Additional reporting by Jennifer Kwan, Julie Gordon and Allison Martell in Toronto, and Swetha Gopinath in Bangalore; editing by Frank McGurty and Rob Wilson)