LSE humbled as it is forced to abandon TMX merger

Canadian borse fails to win over investors for deal with London Stock Exchange
  • @MrNickClark

The London Stock Exchange (LSE) suffered a humiliating blow last night as it was forced to pull the plug on its merger with Canada's TMX after failing to secure shareholder backing for the deal.

The shock collapse of the merger five months after it had initially been agreed left the UK market's chief executive Xavier Rolet red-faced yesterday, and raised inevitable questions over whether the exchange itself would become a takeover target.

The LSE announced it had agreed to terminate the merger after proxy voting on the deal made it clear it was "highly unlikely to achieve the required two-thirds majority approval" from TMX's shareholders. This came despite overwhelming support from the LSE's own investors.

Mr Rolet said he was "clearly disappointed" that despite support for the deal, the companies could not secure the support needed. "We believe the merger would have been a unique opportunity for TMX Group shareholders to be partners in a truly international group," he added.

Tom Kloet, the head of the Canadian exchange, said the board believed a merger "would accelerate our business strategy", before adding it would have "enhanced the performance of Canada's capital markets". The merger fell apart after a consortium of Canadian financial institutions, dubbed Maple Group, tabled a counter bid. Despite the LSE and TMX offering a £400m sweetener to shareholders in the form of a special dividend this month, it was not enough to seal the deal.

Maple Group owns 7 per cent of TMX in its own right, and one market source said securing control "was always going to be a tight call". Maple Group can now proceed with its takeover, although the deal could be hamstrung by competition issues.

Simon Maughan, an analyst at the brokerage firm MF Global, said that the LSE was now a target: "Investors have bought into LSE stock recently in the belief that the TMX bid will fail and the LSE will end up on the block." He added: "I suspect there are more LSE shareholders willing to sell now."

The LSE has been no stranger to takeover approaches since it warded off a bid from the German exchange group Deutsche Börse in 2004, followed by infrastructure investor Macquarie.

The group also defended itself against two approaches from US exchange Nasdaq OMX in 2006 and 2007. Mr Maughan said: "Nasdaq is the prime candidate. There is bad blood between the exchanges, and the Nasdaq management are aggressive. I don't think you have to look far beyond Nasdaq as a bidder for the LSE."

TMX will have to hand over a C$10m break fee after the deal fell apart, which will rise by a further C$29m if the exchange is bought by Maple, but it will be little solace to the LSE, which will have spent more on fees trying to put the deal together. The company would not comment on how much the failed deal had cost.

Yesterday's events will also throw the spotlight on Canada's attitude to foreign bidders. The LSE's failure comes seven months after the Canadian government stepped in to block BHP Billiton's $38.6bn takeover of PotashCorp. One market source said: "It smacks of protectionism, and means that Canada does not look great as a place for international investment."