10/31/2011 12:37 EDT | Updated 12/30/2011 05:12 EST

TMX Board Says It Backs Maple Group's $3.8 Billion Takeover Bid

TORONTO - TMX Group (TSX:X) has warmed to a once-hostile $3.8-billion takeover bid that could see Canada's largest stock exchange owned by a handful of big banks, insurance companies and pension funds.

But the takeover proposal by Maple Group — a consortium of 13 Canadian banks, insurers and pension funds — still faces a potential regulatory chill.

Federal and provincial regulators have yet to rule on whether the proposed ownership structure would create a monopoly that would hurt smaller traders on the Toronto Stock Exchange.

Thomas Kloet, CEO of the TMX Group told a conference call Monday that the board plans to work "hand in hand with our friends at Maple" to convince regulators the deal is right for all players on Canadian markets.

"This arrangement is an excellent path forward for Canada's capital markets to help us both domestically and internationally from a competitive standpoint," he said.

"We look forward to the process ahead," he said a day after the board announced it would advise shareholders to take the Maple offer.

The TMX board had originally supported a merger proposal with the London Stock Exchange Group and dismissed the Maple Group offer over a number of debt, competition and regulatory concerns.

But after the LSE deal failed to gain enough shareholder support in the face of the richer Maple bid this summer, the board turned its attention to the Maple offer. The two sides had been in talks for nearly four months.

Meanwhile, the consortium has been pushing ahead with proposals to four provincial securities regulators, as well the federal Competition Bureau.

The future of the TMX has been a major issue not only on Bay Street but also in Ottawa, where fears were raised that the LSE deal would see Canada's stock markets would come under foreign control.

Maple needs regulatory approvals to merge the owner of the Toronto Stock Exchange with the alternative Alpha Trading System, and clearing and depository firm CDS Inc.

Alpha and CDS are owned by the major players in the Canadian securities industry, several of which are part of the consortium.

Independent firms have expressed concerns about whether the banks will play fair and grant them cost-effective access to clearing and settling trades.

Critics say the deal would create a virtual monopoly that could lead to higher fees and create enforcement and transparency issues.

But Luc Bertrand, spokesman for the Maple Group, said the integrated model Maple is proposing has been successful in other countries and can work in Canada.

"This is a proven and highly-valued business model that we all believe can create significant value for TMX Group."

Bertrand assured independent firms that there would be no "two-tier" pricing structure that would favour the exchange's owners.

"We need to run this business in such a way that fosters confidence in the capital markets without which we can not and will not be successful," he said.

He added that he believes independents will one day agree that the creation of a bigger Canadian exchange was a "brilliant idea."

"This open up a totally new dimension in terms of services to make the Canadian broker-dealer community, whether its independent or non-independent, more competitive, leaner, with better services," he said.

Shares of the TMX Group closed below the offer price on Monday, suggesting that some investors may be skeptical about whether the deal will receive regulatory approval.

The company's stock was up 3.4 per cent, or $1.44, to $43.80 on the Toronto Stock Exchange.

The offer will see Maple pay $50 per share in cash for between 70 and 80 per cent of the shares of TMX Group and the remaining shares later exchanged for a stake in Maple.

Assuming the maximum of 80 per cent of the TMX Group shares are bought for cash under the first step, former TMX Group shareholders will own 27.8 per cent of Maple following the second step.

Bertrand, who was once head of the Montreal Stock Exchange, said Maple Group is confident it can get regulatory approval for the deal by early next year.

However, the group once again extended a shareholder deadline to tender their shares, which had been set for Monday. Shareholders now have until Jan. 31, a date that could be pushed back until April 30, if it takes that long to gain regulatory approval, Bertrand said.

TMX owns the Toronto Stock Exchange and the junior TSX Venture market as well as the Montreal Stock Exchange.

Maple Group investors include the Alberta Investment Management Corp., Caisse de depot et placement du Quebec, Canada Pension Plan Investment Board, CIBC World Markets (TSX:CM), Desjardins Financial, Dundee Capital Markets, Fonds de solidarite des travailleurs du Quebec, GMP Capital (TSX:GMP), National Bank Financial (TSX:NA), Ontario Teachers' Pension Plan, Scotia Capital (TSX:BNS), TD Securities (TSX:TD) and Manulife (TSX:MFC).

Bertrand said the group is involved in ongoing discussions about bringing in the big banks, Royal Bank of Canada (TSX:RY) and Bank of Montreal (TSX:BMO), who had earlier been advising on the LSE deal.

The deal with the TMX board includes a $39-million break fee, which will be paid to the company if the deal doesn't receive regulatory or shareholder support.

But Thomas Caldwell, head of Toronto investment manager Caldwell Securities, which owns shares of TMX Group, believes the deal will eventually be approved by both regulatory bodies and shareholders.

"My sense is this deal will be approved, with the caveats being around clearing and settlement," he said.