London and Toronto stock exchanges propose merger

Wednesday, February 9, 2011

Only weeks before the Canadian government in Ottawa is expected to table a budget which may trigger a national election, the announcement of a proposed 3.2 billion CAD merger between the Toronto (TSX:X) and London (LSE:LSE) stock exchanges to produce the largest single exchange.

Even as news was beginning to leak about the mega-merger, Deutsche Börse AG (FWB:DB1) and NYSE Euronext (NYSE:NYX) announced deep negotiations under way regarding a merger between the third and second, respectively, largest exchange groups by total revenues. The proposed TMX-LSE group merger would produce the largest market in terms of listings - approximately 6,700 companies are traded between the two groups - but total annual receipts would likely not make it the largest in dollars.

Technically the merger is a takeover of Toronto-based TMX by the LSE Group, with LSE shareholders owning 55% of the new company. TMX head Thomas Kloet would become CEO of the new firm, while LSE's executive would take chairmanship of a new board consisting of 8 members from LSE and 7 from TMX.

Canadian Industry Minister Tony Clement has said the government will review the merger, which raises the spectre of a government rejection of a deal which would see yet another large Canadian corporation under foreign ownership. The ruling conservatives have been dogged by the issue, and have blocked two other foreign ownership bids during the current government's terms - last year's Potash Corp. (TSX:POT) takeover bid from BHP Billiton (BHP.AX) and the earlier Alliant Techsystems Inc. (NYSE:ATK) bid for MacDonald (TSX:MDA) space technologies branch, the only two such blocks ever made by a Canadian government.

Canadian opposition parties challenged the Prime Minister over the proposal, with New Democratic Party leader Jack Layton questioning the benefits of the deal. "Of course, Canadian companies need access to foreign capital, but not at the expense of our own capital markets," he said. Canadian Prime Minister Stephen Harper refused to comment on the proposal, having been criticised for involving his office in the Potash bid.

Both the Quebec and Ontario regulatory commissions are also involved in reviewing the deal, which is set for October 2011, as their provincial exchanges are in Montreal and Toronto respectively.