February 8, 2011, 5:52 pm Mergers & Acquisitions
London and Toronto Exchanges Move Ahead With Merger Talks
By IAN AUSTEN
Mark Blinch/Reuters
Toronto Stock Exchange.8:44 p.m. | Updated
OTTAWA — The London Stock Exchange and the TMX Group, the parent company of the Toronto Stock Exchange, are in advanced talks over a merger, the two exchanges confirmed late Tuesday.
If combined, the two exchanges would form what would probably be the largest market for mining and other natural resource stocks.
TMX and the London exchange confirmed the negotiations for “a possible merger of equals” after several British newspapers, including The Financial Times, reported the talks.
“It is currently contemplated that the executive management and senior leadership of the merged group will be drawn from a balance of leaders from both organizations,” the two exchanges said in nearly identical statements. “The merged group would be co-headquartered in London and Toronto and continue to be overseen by its existing regulatory authorities.”
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Any deal would probably face several political hurdles in Canada, where foreign takeovers related to natural resources have become delicate issues. In November, Canada’s federal government declined to approve a $38.6 billion bid from BHP Billiton of Australia for the Potash Corporation of Saskatchewan.
“It’s going to be a hot topic, that’s for sure,” said Stephen Boland, a nonbank financial institution analyst with GMP Securities in Toronto. “It may be the first time we’ve seen a major Canadian financial institution sold.”
A variety of direct and indirect government measures effectively prevent foreign takeovers of Canadian banks and large insurance companies.
The two groups have somewhat similar market capitalizations, with the TMX Group valued at about $3 billion and the London Stock Exchange at nearly $3.9 billion.
Like other exchanges around the world, both Toronto and London face increasing competition from alternative trading systems. In January, SGX, the Singapore exchange, completed plans to buy its Australian counterpart ASX, another exchange heavily weighted with natural resource stocks, in a deal valued at $8.3 billion.
While Toronto has historically been a favorite home of natural resource stocks, London has challenged its dominance recently.
Thomas S. Caldwell, the chairman of Caldwell Financial of Toronto, which is an investor in both exchanges, said the merged exchange would result in “the creation — really, truly and sincerely — of the biggest resource exchange.”
The ability to offer simultaneous listing in London, he said, would increase Toronto’s trading volumes. The biggest gain for London, Mr. Caldwell said, would be access to Toronto’s advanced trading technologies.
Mr. Caldwell said he expected the details of the merger to be “fleshed out” on Wednesday. He said another bid for the TMX Group from a third party might also be possible.
A preview of the coming political test for the proposed merger was provided in 2007 when the TSX Group, as the Toronto exchange’s parent was then known, bought the Montreal Exchange, which handles only derivatives. The transaction was controversial in Quebec and was sold to the public and politicians largely on the basis that the resulting larger exchange would not fall into foreign hands.
Because of that deal, securities regulators in Ontario and Quebec must now waive a rule that caps ownership of the TMX Group by any single entity at 10 percent.
The Canadian federal government will probably review the transaction under its Investment Canada Act, which was used to thwart the BHP Billiton bid for Potash.
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