TORONTO — The so-called plumbing beneath Canada’s stock exchanges is at the heart of a hostile bid for TMX Group Inc. and it is becoming a key element in determining which deal prevails in a hard-fought battle raging between the London Stock Exchange and financial consortium Maple Group.
Stock exchanges have lost their glamour as chaotic trading floors have been largely transformed into blinking computer terminals, but the machinations of clearing and settling stock trades — known in the business as the plumbing — have always taken place in the darker, less exciting corners of the investment industry.
That, however, is the very corner that excites Luc Bertrand, the face of the Maple group that is ramping up its campaign to unseat a friendly tie-up between Canada’s TMX and the London Stock Exchange at a crucial vote on Thursday.
In an interview Friday, Mr. Bertrand said the Maple consortium’s plan of marrying the derivatives clearing operation of TMX with a largely bank-owned equities and fixed income clearing outfit called CDS Ltd. is a more compelling growth strategy to him than mixed success of international expansion and consolidation touted by many others in the industry.
“It’s a very important part of the plan,” he said, adding that the hostile nature of the Maple bid makes it difficult to discuss specifics of the financial benefits that would accrue. But there would be benefits, he said, particularly if it helped land a mandate for what has been described as the “holy grail” of the post-crisis financial overhaul: the central counterparty clearing of derivatives.
The mechanism to reduce risks highlighted by the credit crisis of 2008 was mandated by the powerful economic nations of the G20, but it has not yet been determined whether a Canadian-owned entity will get the job. However, comments from the Bank of Canada this week were encouraging, Mr. Bertrand said.
Mark Carney , the governor of the Bank of Canada, indicated in an interview with the Wall Street Journal Friday that he wants to ensure the central bank’s oversight of the clearing of securities is not impeded by the takeover of TMX, the country’s main exchange operator. This week, the Bank of Canada issued a bi-annual update that discussed the benefits of local central counterparty clearing.
Despite the encouraging signs, Mr. Bertrand acknowledged that winning the central counterparty clearing mandate is a competitive process that could draw interest from global experts looking to set up shop in Canada.
“If they’re better, they’re better. Let them come up with their proposal,” he said.
A legal source who has been following the process closely said Maple’s plan would boost the advantages of a Canadian player, but significant costs would be required to link clearing in Canada to other jurisdictions.
“It’s probably not a slam dunk” for Maple, the source said, adding that the selection process involving the central bank, securities regulators and a financial services industry group is grinding very slowly.
If Maple were to win the mandate “it would be a significant game-changer” providing benefits to both the TMX and “the capital structure of the financial services business,” Mr. Bertrand said. Spelling out the benefits of the consolidated plumbing is a key part of selling the Maple vision because the bid’s cash and stock structure ramps up the debt considerably. Any “synergies” created through the combination would be used to pay down that debt, which has been highlighted as a concern by the TMX board as well as institutional shareholder advisor service ISS.
Mr. Bertrand did not dispute the TMX board’s assessment of the debt to operating earnings ratio of 3.7 times without the synergies, which pushes it above the exchange’s internal limit and close to the regulatory cap of four times earnings before interest, taxes, depreciation and amortization.
The Maple bid, whose supporters include Quebec Premier Jean Charest, got another endorsement Friday. It came from Stephen Jarislowsky, chairman of Montreal-based Jarislowsky Fraser Ltd., who said Maple’s consortium of 13 financial services firms has the firepower to shepherd the Canadian exchange group to the international growth platform promised by the rival merger plan with the London exchange.
“With all due respect to our friends in London, Canada and its financial community do not need their assistance to ensure their development on the international scene,” Mr. Jarislowsky said in a statement distributed by Maple Group.
Mr. Jarislowsky said a “takeover by the London Exchange will result in a weakening of Canada’s financial community” and leave the country “at risk of seeing an exodus of our financial institutions and our brightest financial talents.”
Meanwhile, the TMX board said Friday it continues to recommend its friendly merger with the London exchange, even after reviewing a sweetened $50 a share bid from Maple.
In the continuing war of words between the rival bidders, Xavier Rolet, chief executive of the London exchange, issued a statement late Friday which noted that “for the third time Maple has been dismissed as inferior” by the board of directors of TMX.
The Maple bid “is unlikely to ever be deliverable, it would saddle TMX with too much debt and it is riddled with conflicts of interest,” Mr Rolet said, adding that the bid does not seem to be about patriotism but rather “about control by a small group of very larger traders.”
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