Caisse puts chill on MX, TSX merger

Date: Wednesday, December 12, 2007
Author: Rita Trichur, Business Reporter, The Star.com

Canada's two top bourses may finally be ready to tie the knot, but pension-fund manager Caisse de dépôt et placement du Québec is calling for a "public hearing" on the proposed $1.3 billion cash and stock deal to merge the Toronto Stock Exchange and the Montreal Exchange.

The Caisse, which owns 8 per cent of the MX, finds the proposal "interesting" but wants a public debate to review the merger's "financial and strategic aspects" before blessing the union.

"As a shareholder, we want to know whether the proposed merger is ultimately viable, given the emergence of many competitive platforms in the equity markets and the increasing share represented by Canadian companies interlisted on U.S. exchanges," president and chief executive Henri-Paul Rousseau said yesterday.

On the more delicate topic of governance, the Caisse is pressing for more details about the role of Quebec-based representatives on the combined entity's board of directors and executive committee. Rousseau also expressed concern about the future of Montreal-based operations, a sensitive issue for that city, given its historic rivalry with Toronto.

"Over the years, the Montreal Exchange has developed leading-edge derivatives expertise," Rousseau said. "We would like to know what the Toronto Stock Exchange's intentions are in this regard before we take our analysis further. A public debate is needed."

Quebec Finance Minister Monique Jerôme-Forget said she still wants to study the agreement's fine print but did give a preliminary endorsement. She has previously suggested that a power struggle caused earlier merger talks to fail.

Yesterday, however, the companies presented a united front as they confirmed plans to consummate their drawn-out dalliance through a new company to be called TMX Group Inc. The agreement provides that the company would be headquartered in Toronto but requires that 25 per cent of the board of directors be from Quebec. The head office of MX and the derivatives trading operations would stay in Montreal.

TSX Group would indirectly acquire all of MX's outstanding common shares for total consideration of 15.3 million TSX common shares and $428 million in cash. Montreal Exchange shareholders would receive half of a TSX Group share and $13.95 in cash.

"This combination grows out of a common vision for the future of the Canadian capital markets," said Richard Nesbitt, chief executive officer of TSX Group.

The combined entity would "redefine the Canadian capital markets and strengthen its global positioning," said Luc Bertrand, chief executive of the MX.

Nesbitt would be the chief executive officer and Bertrand the deputy chief. Bertrand would also continue in his role as president and chief executive of MX, while assuming responsibility for information technology at the TMX Group.

Speculation over a possible merger has swirled in recent years because of a wave of international exchange consolidations.

Bertrand acknowledged that "mega players" have developed in recent years. "If you're going to be competitive, you've got to be bigger," he said. "The status quo was not an option."

In addition to the threat of foreign takeover, analysts said, each company faces sharpened competition in respective specialty areas. A standstill agreement that expires in 2009 gave the TSX an exclusive claim on equity trading, while making MX the sole market for options and derivatives.