Little in LSE-TMX deal for investors

Although the mainstream media on both sides of the pond are going to town about the proposed LSE-TMX merger, the sense in the Canadian financial industry is that it’s not really going to set the Thames on fire.

A deal like this only means two companies are looking to develop or defend their market, says Ed Giacomelli, managing director at Crosbie & Co., an investment firm with expertise in advising on merger and acquisition.

“It usually happens when companies are looking to either expand their footprint or defend their footprint,” says Giacomelli. “I get the feeling that this [merger] has the flavour of both.”

New alternative exchanges have been winning market share over the past decade. Competition for where a company can be listed has grown significantly. “And that is ultimately what’s driving this; to retain market share,” he adds.

He warns it may be overoptimistic to expect it to open the floodgates for future M&A activities. “I don’t think it will have any effect on M&A activity,” says Giacomelli. “M&A trends are driven by other factors than who owns the exchanges.”

In the case of Canada the takeover bid rules that most people rely on are set by regulators and not by the stock exchange.

Giacomelli, however, concedes that it’s another marker in terms of cross-border activity. “Canada is on the radar screen of foreign companies, especially if it’s a Canadian company that has a significant market position in their core market, which the TSX certainly does, so it’s consistent with a lot of cross-border M&A that we see.”

Somewhat similar views are held by J. Matthew Beckerleg, partner and portfolio manager at Pembroke Management Ltd. “We believe that there is a good possibility that with low rates and an improving economic landscape, we could see more M&A, especially as large companies look to put their cash reserves to work and look for ways to grow their footprints.”

Beckerleg, though, says he doesn’t believe “the LSE’s acquisition of TMX will have a dramatic effect on our companies or on the overall M&A environment.”

Some speculate that the deal could send the TSX soaring as a unified trading platform will enable more British investors to buy Canadian stocks. Experts disagree as they put things in perspective.

It doesn’t have a lot in it for investors, says Giacomelli, adding it may make it more attractive to issuers who will be able to cross-list in Toronto and London.

“There may be economies of scale that are going to be passed on to issuers, but I don’t believe it will affect investors,” said Giacomelli. “Both exchanges are in the business of attracting new companies to list and I don’t see how that’s going to change.”

And because it’s not the cross-listing that drives share price performance, any hopes of seeing a spike will remain just that. Stock prices are driven by “the prospects of the company and the liquidity in the stock, which is issuer driven, not stock exchange driven; so I don’t really expect it’s going to drive share values higher.”

All things considered, the merger is being viewed by the industry as TMX’s bid to regain and retain its market share in Canada. Recent mergers in the exchange world have adversely affected many major stock exchanges around the world, including TMX.

The LSE-TMX bourse-bonding comes close on the heels of the SGX’s (Singapore Stock Exchange) successful $7.8 billion bid to takeover Australian Stock Exchange (ASX) October last year.

The latter bid broke the long lull in exchange consolidation since 2007, the year that saw a spree in which the NYSE group bought Euronext, the pan-European exchange; Nasdaq bought OMX, a banner under which operated seven European stock exchanges in the Nordic and Baltic regions; and Deutsche Borse bought the International Securities Exchange, one of the biggest U.S. options exchanges.

Although widely billed as a merger between equals, the deal will award 55% of the enlarged bourse to LSE shareholders with TMX investors holding 45%; a fact that hasn’t gone down well with Industry Minister Tony Clement, who reportedly said “it really smells like a takeover of the TMX by the LSE.”

Under the terms of the merger agreement, TMX shareholders will receive 2.9963 LSEG ordinary shares for each TMX share.

In terms of number of companies traded, the proposed merger will create the world’s biggest stock exchange with collective 6,700 listings and a combined market capitalization of $5.8 trillion. The LSE-TMX deal will also make the combined group the biggest global exchange for mining and energy companies and put the group on the fourth spot, ahead of Nasdaq, in annual revenue terms.

“We are creating an international group with deep expertise, undeniable leadership in key sectors and the ability to compete and win on the global stage,” said Thomas Kloet, CEO of TMX Group Inc. “Canadian customers will benefit from access to one of the world’s deepest capital pools while European issuers will have an effective gateway to North American financial markets.”

With some of the most valuable and respected brands in the exchange world, this merger will open new growth opportunities for each of our businesses and all of our stakeholders, added Kloet.

His opposite number, Xavier Rolet, CEO of London Stock Exchange Group Plc., said the merger holds considerable growth opportunities. “We are creating the world’s largest listings venue for the commodities, energy and natural resources sectors, as well as the premium market for small, mid-size and growth companies,” he said.

The consolidation, stressed Rolet, would open a new window of opportunity for Canadian investors looking to explore and exploit emerging markets. “This new international leader, marrying the right cost structure, financial strength, technological expertise and product portfolio, will be strongly positioned to capitalise on growth opportunities in emerging markets and deliver them to our customers in North America, Europe and beyond.”

Related Story: Big Deal: TMX/LSE suddenly seems small