London Stock Exchange Group Plc, the 210-year-old bourse operator, agreed to buy Toronto Stock Exchange owner TMX Group Inc for about C$3.2 billion ($3.2 billion) in stock as the companies cut costs to counter lost market share. London Stock Exchange (LSE) surged to a two-year high.
LSE shareholders will own 55 per cent of the company, while TMX investors will hold the rest, the exchanges said today in a statement. TMX shareholders will receive 2.9963 LSE shares for each they own, valuing the Toronto-based company at about C$42.68 a share, 6 per cent more than yesterday’s closing price.
Xavier Rolet, LSE’s chief executive officer, will reduce £35 million ($56 million) a year in costs and expand into new businesses such as derivatives as competition from alternative trading platforms increases as do mergers among rivals. His predecessor Clara Furse fought off five takeover offers in two years and bought the operator of the Milan stock exchange. The LSE’s share of UK equity trading was 63.8 per cent last quarter, compared with 75 per cent in 2009, data from the London-based company show.
“This deal comes against the backdrop of consolidation in world exchanges and represents the first strategic move by Xavier Rolet,” Phil Dobbin, an analyst at Shore Capital Stockbrokers, wrote in a note to investors today. “The key benefit is the creation of a global exchange with a strong presence in natural resources and emerging markets.” He has a “buy” recommendation on LSE.
Rival bids
Today’s agreement comes four months after Singapore Exchange Ltd offered to buy ASX Ltd, operator of Australia’s main bourse, for A$8.4 billion ($8.5 billion) in a cash and shares deal that would create the world’s fifth-largest listed exchange company. Thomas Kloet, chief executive of TMX, was CEO of Singapore Exchange until December 2002.
LSE surged as much as 11 per cent to 989 pence and traded up 9.5 per cent at 977 pence at 10.35 am today in London as some investors speculated that the agreement may spur competitors to table rival bids.
“The market may potentially see this merger announcement as both LSE and the Toronto Stock Exchange putting themselves in play,” Nese Guner and Haley Tam, analysts at Citigroup Inc in London, wrote in a note to investors today.
LSE was advised by Barclays Capital, Morgan Stanley & Co and RBC Capital Markets. Bank of America Corp’s Merrill Lynch and BMO Capital Markets advised TMX.
Face opposition
The bid may face opposition as the Canadian government reviews its foreign ownership rules after blocking a hostile takeover of Potash Corp of Saskatchewan Inc. Canadian law allows the government to reject foreign takeovers that don’t provide a “net benefit” to the country. The Ontario and Quebec securities regulators would also have to approve any sale of more than 10 per cent of the voting shares of TMX.
A sale to the London exchange would be the largest foreign takeover of a financial services company in Canada. The federal government is reviewing the limits, which apply to industries including airlines, telecommunications firms and media.
Industry Minister Tony Clement and Finance Minister Jim Flaherty declined to comment on the stock exchange merger talks yesterday in Ottawa.
The deal is forecast to close in autumn this year, Rolet said today on a conference call with reporters.
Annual savings
The exchanges are targeting £35 million or C$56 million in additional revenue in the third year, rising to £100 million or C$160 million annual revenue in the fifth year. This will come from cross-listings and admissions, cross-selling and distributing products and services and new products, according to today’s statement.
In costs, the target is for annual savings of £35 million or C$56 million by the end of the second year. The deal is expected to add to earnings per share in the first full year after completion.
“We believe that this level of cost synergies is achievable even with a board of 15,” James Hamilton, an analyst at Numis Securities in London, wrote in a note to investors. With the revenue forecast “should these synergies be achieved they would equate to a huge 56 per cent of the underlying profit reported by the LSE last year. A clear strong ‘Buy’ if you believe the 100 million pounds of revenue synergies can be achieved.”
Rolet will be CEO of the enlarged company, which will be renamed, according to today’s statement. TMX CEO Kloet will become president, and Michael Ptasznik, chief financial officer of TMX, will be CFO.
