TMX Group And London Stock Exchange Agree To Merger

TMX Group, which operates the Toronto Stock Exchange, and the London Stock Exchange announced Wednesday they are merging to create one of the world’s largest stock exchanges.

The merger, which is subject to regulatory approvals, is unanimously being recommended by the boards of both exchanges.

The merger, if approved, would give the new firm a value of just over C$6 billion and give LSE shareholders just over 50 per cent of the combined company.

TMX Group is valued at C$2.99 billion, while the London Stock Exchange Group’s value is slightly higher, around C$3.25 billion.

The merger would see the new company become the world’s biggest exchange operator for mining and energy stocks, which have been key drivers of growth for both companies.

The company will be co-headquartered in Toronto and London with Xavier Rolet, the CEO of the London Exchange, retaining that position with the new company. The president will be Thomas Kloet, the CEO of TMX.

Shares of TMX Group, which closed up 38 cents at $40.28 on the Toronto Stock Exchange, were halted Tuesday amid reports of the talks.

“This is an incredibly exciting merger with considerable growth opportunities,” said Rolet in a statement early Wednesday.

“This is an incredibly exciting merger with considerable growth opportunities. We are aiming at nothing less than becoming a true powerhouse in the global exchange business.”

Kloet added that the merger will give Canadian customers access to one of the world’s deepest capital pools while European issuers will have an effective gateway to North American financial markets.

“This merger brings together talented market professionals across a wide geography, positioning the group for continued leadership in financial markets,” said Kloet.

Thomas Caldwell, chairman and CEO of Caldwell Securities Ltd. and an investor in both exchanges, said Tuesday that a merger could make it easier for Canadian companies to gain exposure to foreign investment.

“You’re creating the largest resource exchange in the world and companies like to cluster so if you’re in the resource business you want to be listed on one of these two exchanges,” he said.

“If the two exchanges merging allow me with my public company here to get an easy listing in London, I’d love that because it would give me access to a greater number of investors in Europe and the Middle East.”

In addition to the Toronto Stock Exchange, TMX Group also operates the TSX Venture Exchange, Montreal Exchange, Natural Gas Exchange, Boston Options Exchange, Shorcan and Equicom.

The London Stock Exchange Group operates the London Stock Exchange and the Italian stock exchange Borsa Italiana.

TMX Group earns revenue every time a new company lists on the exchange and each time a trader buys or sells securities, as well as through selling trading data.

The resource-weighted TSX has been outperforming most other global stock exchanges as commodity prices gain strength.

It ended 2010 up 14.45 per cent, led by a 47 per cent surge in the base metals sector on demand from China and other emerging markets.

Caldwell said that the mergers in the exchange world usually don’t happen in isolation, and noted it could spark takeover talk at other exchanges or even a bidding war.

“Mergers when they start, they happen in explosions,” he said.

“Suppose New York was worried about London having a toe-hold here, what would stop them from making a bid for Toronto on Thursday?”

An $8.5-billion takeover of the Australian Stock Exchange by Singapore Exchange Ltd. announced in November sparked merger and acquisition speculation about other markets.

In November, TMX Group announced that it would open an office in London in the early part of this year to focus on business opportunities in European markets. TMX chief executive Thomas Kloet has said the group was open to considering closer partnership or acquisition opportunities.

The Toronto and London exchanges already have a close relationship and the merger will create synergies, giving the London exchange access to Toronto’s more advanced technology and to its derivatives markets, Caldwell said.

A takeover of TMX Group would likely require approval by federal Industry Minister Tony Clement under provisions of the Investment Canada Act which requires such deals to be a net benefit to the country.

Clement took note of the merger talks in a statement issued late Tuesday. “Should these discussions result in a concrete investment proposal, I and my officials will look at how the Investment Canada Act applies,” he said.

Clement made headlines last year when he rejected a hostile takeover bid by BHP Billiton worth nearly $40 billion for PotashCorp (TSX:POT) as not being of net benefit to Canada.

That was the just the second time that a deal was flatly rejected under the act.

Ottawa blocked an attempt by MacDonald, Dettwiler and Associates Ltd. (TSX:MDA) to sell its space division to U.S. defence firm Alliant Techsystems Inc. in 2008.