Ontario lawmakers plow through risks of TMX-LSE tie-up

By Claire Sibonney

TORONTO (Reuters) – A major corporate failure or sovereign debt crisis in Europe could spread to Canada more easily if the London Stock Exchange is allowed to join forces with its Toronto counterpart, a critic of the LSE’s plan to take over the TMX Group said on Thursday.

Jon Aikman, a lecturer of finance at the University of Toronto’s Rotman School of Management, said TMX Group should look to partners in China and other emerging markets if its goal in agreeing to the LSE’s C$3.1 billion ($3.2 billion) takeover is to give Canadian listed companies greater access to capital.

Aikman, a member of the bar in both Canada and Britain, spoke at the second day of hearings before a special committee of the Ontario legislature.

Alpha Group, a bank-backed competitor of TMX Group’s Toronto Stock Exchange, echoed some of Aikman’s concerns at hearings on Wednesday, questioning “who is going to call the shots” should another financial crisis happen.

The Ontario panel’s review, while not legally binding, will help securities regulators in the province decide whether the deal is in the public interest.

Aikman also questioned the minority 45 percent stake that TMX shareholders would get under the deal. That would leave the TMX vulnerable if a new phase of consolidation sweeps through the global exchange business, as expected.

“If we understand that the move is toward market harmonization, and toward a global network, then it would seem that we should not be a junior partner at the table,” he said.

If the end game is the formation of three or four global exchanges, Aikman asked, why would Canada want to be in the first step of that process?

Aiken’s views contrasted with those voiced by Rotman’s dean, Roger Martin.

“It would be a shame to enforce something other than reciprocity in this case,” Martin told the panel, arguing the job of government is not to protect domestic companies from the evolution of global markets.

On Wednesday, the architects of the deal — LSE Chief Executive Xavier Rolet and his TMX counterpart Tom Kloet — told skeptical lawmakers the friendly transaction would be good for Canada.

Kloet said control and regulatory supervision of the Toronto exchange would stay in Canadian hands even after the TSX’s owner is folded into the larger London-based company.

Another speaker, Garry Neil, executive director of the Council of Canadians, said the Ontario government should keep in mind the painful lessons of previous deals in which foreign companies took over leading domestic firms.

“Canada’s experience with foreign investors taking over strategic Canadian assets is not good, and we would not expect a different outcome in this case,” said Neil, who heads the citizen advocacy group.

He said US Steel’s takeover of Canada’s Stelco and Brazilian miner Vale’s acquisition of Inco ended in “disastrous” job losses and strikes.

Neil said the issue is ultimately about protecting the country’s democracy and sovereignty.

The final say over the deal may come from the federal government, which will hold its own formal review to determine whether the takeover would carry a “net benefit” to Canada.

Industry Minister Tony Clement promised to bring more clarity to the concept of “net benefit” soon after he rejected a bid by Anglo-Australian miner BHP Billiton for Canadian fertilizer producer Potash Corp last November. But he has not done so yet.

At Thursday’s hearing, Rotman’s Martin said that the government’s main test for allowing or rejected foreign takeovers was flawed. He said the “net benefit” rationale for the Potash ruling was wrong.

Martin said Ontario should work to make Canada an attractive destination for investment by foreign-owned multinationals.

“I think it would be a horrible mistake to attempt to keep this Canadian owned for the sake of Canadian ownership. I’d think you won’t have a TMX of any consequence in 15 years from now if that were the case.”

($1=$0.97 Canadian)

(Reporting by Claire Sibonney)