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Toronto and Montréal merge in $1.3bn deal

Date: Tuesday, December 11, 2007
Author: Luke Jeffs & Shanny Basar, Financial News Online US

The Toronto Stock Exchange and Canada’s largest derivatives market are combining following $26bn (€18bn) of exchange mergers so far this year.

Montréal Exchange and TSX Group, the owner of the Toronto stock market, have agreed to combine and create TMX Group in C$1.3bn ($1.3bn) deal.

Luc Bertrand, president and chief executive of the Montréal Exchange, said: "TMX Group will list, trade, clear and offer market data for both cash and derivatives markets across multiple asset classes."

Richard Nesbitt, chief executive officer of TSX, will have the same position in the new group and Bertrand will be the deputy chief executive. Bertrand will continue in his role as president and chief executive of the Montréal market and will assume responsibility for information technology of TMX Group.

The head office of TMX Group will be in Toronto. The board will be led by Wayne Fox, the current chair of TSX Group, and will include five Montréal designated board members, including Bertrand. The agreement requires that a quarter of the directors of TMX Group be residents of Québec.

TMX Group said it expects strong prospects for growth outside Canada, particularly in the US via Montréal's stake in Boston Options Exchange.

The two exchanges are targeting cost synergies of C$25m ($25m) per year from combining technology platforms, rationalizing premises and data centers and reducing corporate costs.

Montréal has agreed to pay Toronto a termination fee of C$46m in certain circumstances if the amalgamation is not completed.

BMO Capital Markets and Desjardins Securities were financial advisors to TSX Group and UBS was strategic advisor with respect to the international aspects of the transaction.

Montréal used Citigroup and National Bank Financial as financial advisors.

Davies Ward Phillips & Vineberg acted as legal counsel to TSX Group with Cleary Gottlieb Steen & Hamilton as US counsel. Ogilvy Renault was legal counsel to Montréal.

The Canadian exchanges struck an agreement in 1999 whereby neither could list the other’s products for 10 years, enabling the Toronto exchange to focus exclusively on equities and Montreal to trade derivatives. However, both have signaled they may muscle in on the other’s territory when the pact runs out next year.

The Toronto Stock Exchange has already agreed a $25m joint venture with the International Securities Exchange, the US options market. The chief executive of Bourse de Montreal said last month the exchange could move into equities next year.

Merger talks between the two Canadian markets collapsed last year with Quebec officials accusing Toronto of not wanting to give a prominent role to the Bourse de Montreal management team.

The Toronto deal is subject to the approval of the boards, regulators and shareholders.

There has been $26bn of announced exchange mergers this year, according to Delaogic, the investment banking research provider, ahead of last year's $25bn. The announced total rises to $69bn if deals that were subsequently withdrawn or rejected are included.