TORONTO - TMX Group's (TSX:X) board of directors has rejected a $3.6-billion takeover proposal from a Canadian consortium of banks and pension plans, saying the bid breeds too many uncertainties, including regulatory and debt risks.
The operator of the Toronto Stock Exchange said the bid made by Maple Group Acquisition Corp.-- comprised of four big banks and five pension funds -- is not superior to its proposed merger with the London Stock Exchange Group.
Citing a host of issues with the bid, TMX said Maple's offer could not "reasonably be expected to result in a superior proposal."
The TMX has promoted its controversial deal with LSE Group -- announced in February as a merger of equals but technically a takeover -- as a move that will still allow the Canadian exchanges to operate independently.
"The board supports TMX Group's proposed merger with LSEG to form a globally competitive yet domestically focused exchange group with strong opportunities for growth," Wayne Fox, chairman of TMX's board, said in a statement.
"The board's view is that the merger with LSE continues to be in the best interests of TMX Group and its shareholders and stakeholders."
The TMX said it made the decision after consulting with financial advisers and outside counsel in response to the Maple proposal made last Sunday.
Responding to the rejection, Maple Group spokesman Luc Bertrand, vice-chairman of National Bank Financial, expressed disappointment that the TMX Board has decided not to engage in discussions with respect to "our clearly superior proposal."
"There should be no doubt as to the superiority of our proposal based on the fact, among other things, that since our proposal was announced the TMX Group stock price has traded well above the implied value of the LSE change of control transaction," Bertrand said in a statement.
"We note that the LSE transaction is also subject to a number of material regulatory approvals and other conditions. We will determine our next steps in due course."
Meanwhile, Maple said it remained confident that its bid could obtain all necessary shareholder and regulatory approvals and close by late Fall.
The $48 per share bid -- $33.51 in cash and 0.3 of a share in Maple -- which the group has touted as a "truly Canadian" alternative, represents a 24 per cent premium to the value of a proposed merger with the British stock exchange owner.
As a result of the rejection, Maple now has the option of sweetening its bid or going directly to shareholders.
The TMX board said the financial value of Maple's offer is inadequate because the proposal means a change in control of the firm.
It also said the deal is highly leveraged and would nearly double the company's debt. The proposal would result in about $1.1 billion of outstanding debt.
"This leverage generates much, if not all, of the earnings accretion referenced in the Maple proposal and could constrain TMX Group's ability to execute and implement strategic opportunities in the future without providing offsetting business benefits to TMX Group," it said in its statement.
TMX also cited inadequate information in the proposal about Maple's future business plans and its senior management team responsible for the TMX Group.
Maple Group's ambitious plan includes acquiring TMX's rival Alpha exchange and clearing firm CDS Inc. -- which are already partially-owned by the major banks trying to buy the TMX.
Maple's investors include: CIBC World Markets Inc., National Bank Financial Inc., Scotia Capital Inc., TD Securities Inc., Alberta Investment Management Corporation, Caisse de depot et placement du Quebec, Fonds de solidarite des travailleurs du Quebec, the Canada Pension Plan Investment Board and the Ontario Teachers' Pension Plan Board.
The group does not include Canada's biggest bank, the Royal Bank (TSX:RY), or Bank of Montreal (TSX:BMO), which are advisers to the TMX and the London Stock Exchange and own stakes in both Alpha and CDS.
The group's bid is conditional on receiving approval from the Competition Bureau -- a question that has been looming over the bid, and was a main reason why TMX's share price did not rise to the $48 per share offered by Maple. Shares in TMX closed at $44.06 Friday on the TSX.
The TMX board took issue with the fact that the group did not provide any information on the value of the Alpha Group or CDS Inc. and how they would be combined with the exchange operator.
"(That brings) significant uncertainty to the value of the non-cash component of Maple's proposal, which constitutes a material component of the proposed consideration," TMX said.
TMX also said there were too many risks associated with whether Maple would be granted approval from the Competition Bureau.
"Under the Maple proposal, TMX Group and TMX Group shareholders bear all of the regulatory risk and the Maple proposal contains no compensation for TMX Group if regulatory approvals are not received," it said in a statement.
Instead the board continues to back the proposed merger with LSE, although it is not without its own regulatory challenges.
The groups have submitted their merger proposal to various authorities and will be reviewed by provincial governments and securities regulators as well as by the federal government under the Investment Canada Act.
Under the Maple proposal, the group would appoint eight nominees to sit on the board, with additional independent directors to be determined in consultation with TMX Group.
