Stock exchange merger good for junior explorers, executives say

“We anticipate the merger will benefit public companies of all sizes, but in my opinion SMEs will benefit the most,” said John McCoach, president of the TSX Venture Exchange, speaking at a recent luncheon in Vancouver hosted by the BC Association of Mineral Exploration (AMEBC). “Investors will benefit from the increase in liquidity, lower transaction costs, and access to new investment products.”

McCoach was joined on the podium by Kevan Cowan, president of TSX Markets and group head of equities.

Under the proposed merger deal announced in February, the LSE and the TMX Group, the parent company of the TSX, would combine into the LSEG-TMX for a market cap of C$6.9 billion.

The deal would mean LSEG shareholders own 55% of the merged company and TMX shareholders own 45%. The arrangement requires approval by the Investment Canada Act, the same act used by the Canadian federal government last year to block BHP Billiton’s hostile takeover of the Potash Corp. of Saskatchewan. If approved, the merged stock exchange would contain the largest number of natural resources, mining, energy, and clean-technology companies in the world, with 3,600 combined AIM and TSX Venture Exchange listings.

McCoach said it’s important to recognize that the deal is not a merger of stock exchanges, but of the parent companies, meaning the five exchanges currently operating between the LSE and the TSX would continue to operate independently. That means the listings standards and regulations for the TSX and the TSX Venture exchanges will remain in force, as will the fees paid by investors.

Cowan said the merger is a continuation of a broader trend toward stock market consolidation, pointing to the example of Euronext N.V., which merged in 2007 with the NYSE Group. Euronext itself is a product of a merger of three European exchanges that combined in 2000.

Cowan addressed the key question being asked among stock market watchers and a governmental committee currently reviewing the deal. That is, are Canadians better off standing alone or consolidating?

“As we see other exchanges coming into Canada, competing for listings and capital here, we see flows moving in and out of Asia more quickly,” he said. “Our view is we will be much better able to serve our customers, being part of that global consolidation.”

Some have raised fears that the deal could lead to the eventual swallowing of the TSX Venture by AIM, the LSE’s venture exchange, but Cowan tried to assuage those fears, noting the TSX Venture is a highly successful model that would continue to thrive under the consolidation.

“Who would’ve thought it would trade 500 million shares in a day, and do $10 million in financings in any year? — it’s the world’s most successful venture market.”

Cowan also addressed the question of whether the deal would give away too much control to London due to the 55%-45% ownership split. He said the exchanges have common shareholders that “could move overnight” to change the balance.

Cowan and McCoach said the most direct benefit to investors from the merger would be the ability for companies to inter-list, thus dramatically expanding their opportunities for liquidity. Cowan noted over half the trading on the TSX and TSX-V is from outside Canada, mostly the United States; in Europe there is 18 trillion in investment capital.

“We certainly believe that by bringing greater visibility of our listed issuers to a broader international investor class that we will be able to enhance the liquidity to our customers,” he said.

The deal is currently being scrutinized by the Ontario (provincial) government, which may persuade the federal government to block the deal if it believes the merger does not provide a net benefit to Canada.

A report released earlier this month by a committee of the Ontario Legislature makes nine recommendations, aimed at addressing the concern that the transaction is not in Canada’s national interest, The Globe and Mail reported. Among the recommendations, the board says the two parties must make “an irrevocable commitment” that the operations, assets and key staff of TMX Group reside in Canada; that TMX Group shareholders are not prevented from owning a majority of shares; and that the role of the Ontario Securities Commission is not diminished.

The report also says the board should consist of an equal number of directors form Canada and the United States (the proposal currently specifies 8 from LSE and 7 from TMX Group), and the transaction should preserve the TSX’s role as the global leader in raising equity for mining companies.