Institutional Shareholder Services (ISS) has thrown its weight behind The London Stock Exchange’s (LSE) proposed merger with Toronto exchange operator TMX Group. The move echoes an earlier recommendation by adviser Glass Lewis & Co and may set back prospects of a hostile bid from Maple Group Acquisition Corp, a consortium of 13 Canadian financial institutions, insurance companies and pension funds.
Still, as the clock ticks toward a proxy showdown at month’s end, the market still awaits a likely ISS recommendation directed toward TSX shareholders (the group also addressed by the Glass Lewis report) and the contenders remain locked in an intense battle for the hearts and minds of investors.
‘We completely understand why the transaction would be very much in the interest of LSE shareholders,’ says Peter Block, a Maple Group spokesperson. ‘Having no competing bid also makes a recommendation easier. We’ll see what happens on the TMX side.’
In its recommendation to LSE shareholders, ISS endorsed the LSE’s friendly C$3.2 bn deal with TMX as ‘no issues have been identified with the process, nor with the shape of the board following the merger and the strategic case is acknowledged.’ ISS noted ‘opposition to the deal has come mainly from TMX shareholders and little opposition has been expressed from LSE investors’.
In its report, Glass Lewis (owned by a key backer of Maple Group) called Maple’s proposed transaction ‘strategically compelling’ but recommended TSX shareholders vote for the London tie-up largely on the basis that ‘the LSE merger has a greater probability of obtaining all necessary regulatory approvals’.
Maple Group shot back with a vigorous rebuttal. A June 17 release called the information and analysis contained in the Glass Lewis report ‘deeply flawed’.
‘These errors draw into question whether Glass Lewis properly considered or even read the Maple Group Offering Circular… or Maple’s recent investor presentation,’ according to the release.
Luc Bertrand, chief spokesman for Maple Group, said in a speech on Monday that his organization’s C$48/share offer to acquire 70 percent of TMX Group shares was ‘undeniably superior’. The LSE transaction is more takeover than merger and means less influence for Canada, he said, adding there was no premium for TMX shareholders in the all-share merger proposal and no certainty in terms of dividend payment.
‘Why offer the TMX on a silver platter to the LSE, and what are we getting in return?’ asked Bertrand, a former president of the Montreal Stock Exchange and vice-chairman of National Bank Financial. ‘Why should we give up to a lesser regulatory environment when the one we currently have has worked so incredibly well for us and has made Canada literally the envy of the world when it comes to the management of our capital markets?’
According to Block, what issuers get in return is largely the ‘promise’ of more interlistings and liquidity. ‘But looking at recent cross-Atlantic and European exchange mergers, there’s no evidence of that,’ he says. ‘Just because the LSE owns the TMX doesn’t mean it will help a junior oil and gas company raise money out of Europe.’
Kevan Cowan, president of TSX Markets and group head of equities, begs to differ. Pointing to the wave of consolidation and internationalization sweeping the exchange business, Cowan told a group of CIRI members on June 6 that access to a larger liquidity pool would augment opportunities for lower-cost capital raising.
‘By bringing the exchanges together, we would have more connectivity to international investors,’ said Cowan. ‘There would be lots of new eyeballs introduced to Canadian listed companies.’ He added that the combined entity proposed in his deal would have more than 6,700 listings and provide ‘the critical mass to bring more services to our issuers.’
TMX and LSE shareholders vote on June 30. TMX needs a two-thirds vote while the LSE needs a majority vote to proceed with the deal.
