06/29/2011 01:09 EDT | Updated 08/29/2011 05:12 EDT

TMX, London Stock Exchange End Merger Agreement


THE CANADIAN PRESS -- TORONTO - The operators of the Toronto and London stock exchanges have killed a $3.7-billion proposed merger, saying the controversial deal could not garner enough shareholder support to go ahead.

TMX Group (TSX:X) said Wednesday that a majority of proxy votes received ahead of its Thursday annual meeting supported the deal but that was not enough to meet the required two-thirds approval.

TMX Group chief executive Tom Kloet said the company will now review a rival hostile takeover bid by Maple Group Acquisition Corp., a group of 13 major Canadian banks and pension funds.

"We will be evaluating opportunities including that one," Kloet told a conference call.

The Maple Group said it hopes the way will now be clear for its own bid, which also requires regulatory and shareholder approval.

"We are very pleased with the support our offer received from TMX Group shareholders. We commend the LSE and TMX for their efforts, and hope we may now engage in a positive dialogue with the TMX Group board," spokesman Luc Bertrand said in a statement.

"Maple will continue to diligently pursue receipt of all necessary regulatory approvals and will continue to engage in a constructive dialogue with stakeholders from across the spectrum."

TMX will pay a $10-million break fee to the LSEG (LSE:LSE), and a further $29 million if the Maple deal goes through within 12 months.

The rejection of the merger with the LSE now puts more pressure on the TMX to negotiate a friendly deal with Maple Group, which now has the only bid on the table. The rival bidder's $3.7-billion offer has been repeatedly rejected by the TMX, mainly because it is considered loaded down with too much debt.

Kloet said the exchange owner still opposes that bid.

However, now that the LSE deal is dead, two major Canadian banks that had advised on that deal — Royal Bank of Canada and Bank of Montreal — may now be free to join the Maple Group and that could lead to a revised offer with financial conditions more palatable to the TMX.

In a statement, Xavier Rolet, the CEO of the London Stock Exchange Group said he was "disappointed."

"We believe the merger would have been a unique opportunity for TMX Group shareholders to be partners in a truly international group, co-located in Toronto and London, focused on growth and opportunity," he wrote.

Proponents of both bids have been waging a media and speaking blitz to win support in recent weeks.

Some financial players were concerned that Canada's stock exchange would be under foreign control, with the combined group's chief executive based in London. LSE shareholders would have owned 55 per cent of the combined company, while TMX Group shareholders would have owned 45.

The merger had received the stamp of approval Monday from a group of 11 top Bay Street players, including former TSX chief executive Rowland Fleming, Caldwell Securities chairman and CEO Tom Caldwell, CI Financial (TSX:CIX) executive chairman Bill Holland and Raymond James chief executive Paul Allison.

The support of Holland was significant because independent mutual fund company CI Financial is one of TMX Group's largest shareholders.

Meanwhile, investment guru Stephen Jarislowsky, who was one of the key forces in organizing support against the BHP Billiton hostile takeover offer for Potash Corp., had thrown his support behind Maple, saying Toronto does not need the help of London to build a global player in the stock trading business.

Earlier Wednesday, NDP Industry critic Peter Julian said the deal, wasn't good for Canada.

"There is no other way to put it, it is a takeover of our capital markets," which he said should be regarded as a national strategic asset.

The LSEG and TMX had sweetened its offer in recent days in an attempt to lure investors to the all-stock deal, by proposing a special dividend of $4 per TMX share. The companies also promised to continue to pay a dividend equivalent to the current TMX rate, replacing an earlier plan that would have seen TMX shareholders take a hit.

The Maple Group countered by increasing its stock-and-cash offer to $50 per share up from $48 — on the condition that shareholders of TMX Group reject the merger with the LSE.

Had the merger with the LSEG gone ahead it would have required approval by the federal government under the Investment Canada Act — the same hurdle that tripped up BHP Billiton's hostile takeover bid for PotashCorp (TSX:POT).

However the Maple bid has its own regulatory obstacles.

The offer will be reviewed by the Competition Bureau because several of the Maple consortium members are also investors in Alpha Group, a rival stock exchange that is a major competitor to the Toronto Stock Exchange.

Maple has said it wants to merge Alpha as well as CDS Clearing and Depository Services with TMX.

The deal will also require approval by provincial securities regulators in Quebec, Alberta, British Columbia and Ontario. TMX shareholders have until Aug. 8 to tender their shares to Maple Group's offer, but that could change.

Maple Group members include the Canada Pension Plan Investment Board, CIBC World Markets, the Ontario Teachers' Pension Plan, Scotia Capital, Manulife and Desjardins Financial Group.

Collectively, Maple members currently own 6.5 per cent of the TMX.

Mary Gazze, The Canadian Press