TMX-LSE merger plan reflects global consolidation trends, but with hurdles ahead

• Source: Xinhua
• [10:31 February 13 2011]
• Comments

REGULATORY HURDLES, POLITICAL IMPERATIVES MAY DERAIL PACT

As soon as the TMX-LSE deal was announced, the ghost of the failed bid by the Anglo-Australian mining giant BHP Billiton to take over Canada's Potash Corporation of Saskatchewan last autumn started to haunt the corridors of the centers of power that would play a role in deciding the fate of the exchange deal.

Although the merger is subject to approval by the federal government, senior officials from the Ontario and Quebec provincial governments already sounded a cautionary note on Wednesday, as it emerged that TMX shareholders would own 45 percent of the combined entity while LSE shareholders would have the majority 55 percent, and that the LSE side would hold eight out of the 15 seats on the Board of Directors.

Both Ontario and Quebec authorities have the right to veto any proposed deal concerning the TMX if one shareholder is going to own more than 10 percent of the joint entity. Canada's securities industry is regulated by provincial authorities, and the TMX is subject to the oversight of both Ontario and Quebec as itself is the combined entity of the Toronto and the Montreal stock exchanges after the two merged in 2008.

Commenting on Wednesday that "the control will rest with the other side," referring to the LSE, Ontario's Minister of Finance Dwight Duncan on Friday called the TSX a "strategic asset," a reminder of the language used by those who were fiercely opposed to the Potash deal and who succeeded in derailing it after igniting a tidal wave of public sentiments against the takeover.

The Quebec government likewise expressed concerns and wanted the province's securities regulator to hold public hearings on the matter.

"The just-announced proposal to merge the London and Toronto stock exchanges raises important issues for the economies of Quebec and Canada," said Finance Minister Raymond Bachand, adding that the Quebec government will take the time to examine carefully the proposed merger to make sure it is in the province's best economic interests.

In the nation's capital, Jack Layton, the leader of the left- leaning New Democratic Party (NDP), led the charge during Question Period on Wednesday and called the "supposed" merger a "takeover" that has Canadian worried.

"Will he take steps to make sure that this is in fact a merger of equals and not a takeover, and there is access for smaller firms, and regional interests are respected," he challenged Prime Minister Stephen Harper while addressing the Speaker of the House of Commons, as is the protocol.

Accusing the Conservative government of repeated failures to " tell the difference between beneficial foreign investments and damaging takeovers," Layton pressed the prime minister to commit to public hearings on the matter and full transparency of the process.

In response to the NDP leader's fiery rhetoric and aggressive questioning, Harper and his Minister of Industry Tony Clement, who oversees the agency that approves major merger deals on behalf of the federal government, in no way resembled the principled conservatives mounting a robust defense of the free market and the free flow of capital.

Repeatedly and rather blandly, the prime minister responded that the proposed deal is a "complex transaction," that there is a legal process for examining the deal under the Investment Canada Act, and that the process will take its due course, lines parroted by Minister Clement.

Perhaps the prime minister and his minister were reliving the memory of how Investment Canada, the regulatory agency overseeing cross-border deals, had to reverse itself in the Potash takeover after Ottawa encounters a firestorm of public opposition to what was viewed as the hostile takeover by a foreign giant of a strategic asset and a Canadian corporate icon.

The day after the TMX-LSE deal was announced, an item on the home page of The Global and Mail website may well be a harbinger of things to come.

It was an innocuous piece about the ruler of Dubai, Sheik Mohammed bin Rashid Al Maktoum, who is the largest shareholder of the LSE and would be the largest shareholder in the merged entity; his business interests and their travails in the volatile global economy over the past few years.

On Friday, it is again Ontario's Minister of Finance who spoke what has been on the mind of many Canadians ever since the news broke. Expressing his concerns about the biggest shareholder being from Dubai, Duncan said: "We do business with Middle East. I am just not sure I want them owning our stock exchange."