By Nandini Sukumar, Nina Mehta and Whitney Kisling
Feb. 9 (Bloomberg) -- London Stock Exchange Group Plc, the 210-year-old bourse operator, agreed to buy Toronto Stock Exchange owner TMX Group Inc. in an all-share transaction valued at about C$3.2 billion ($3.2 billion) as the companies cut costs to counter lost market share.
LSE shareholders will own 55 percent of the enlarged group, while TMX investors will hold 45 percent, the companies said today in a Regulatory News Service statement. TMX shareholders will receive 2.9963 LSE shares for each TMX share held, valuing TMX shares at about C$42.68 each. The stock closed at C$40.28 yesterday.
?We are creating the world?s largest listings venue for the commodities, energy and natural resources sectors, as well as the premium market for small, mid-size and growth companies,? Xavier Rolet, chief executive officer of LSE, said in the statement. ?We are aiming at nothing less than becoming a true powerhouse in the global exchange business.?
Rolet will become CEO of the enlarged group, which will be renamed after the transaction completes, according to the statement. Thomas Kloet, CEO of TMX, will be president, and Michael Ptasznik, chief financial officer of TMX, will be CFO. Raffaele Jerusalmi, CEO of LSE?s Borsa Italiana, will be a director. Stock in the new company will trade in both London and Toronto.
Expand in Derivatives
LSE handled 63.8 percent of U.K. equity trading last quarter, compared with about 75 percent in 2009, data from the London-based company show. The Toronto Stock Exchange had 64 percent in December, down from 95 percent two years earlier, according to data compiled by the Investment Industry Regulatory Organization of Canada.
The merger is an attempt to maintain profitability and expand in derivatives as the companies? loss of business in trading worsens, said Diego Perfumo, an analyst at Equity Research Desk in Greenwich, Connecticut, who advises hedge funds. In the U.S., where the New York Stock Exchange and Nasdaq Stock Market controlled 80 percent of volume a decade ago, no firm accounts for more than 27 percent, Barclays Plc data show.
?Competition in equity trading is intensifying, so exchanges need to be able to trade more cheaply and at faster speed against alternative trading venues,? Perfumo said. ?The LSE and TMX need to become the low-cost provider with the fastest execution platform to compete effectively and hence try to reverse or slow this market-share trend.?
Expense Reductions
Operating profit may rise 13 percent through expense reductions at the merged company, Macquarie Group Ltd. said in a report sent to clients yesterday after the companies confirmed they were in merger talks.
Perfumo said the combined company will probably standardize stock trading on a system operated by the LSE called Millennium, which the exchange purchased in 2009 as a way to compete with electronic venues such as London-based Chi-X Europe Ltd. and Bats Europe, a unit of Bats Global Markets in Kansas City, Missouri. Millennium will allow the merged exchanges ?to pursue more volume and speed,? he said.
NYSE Euronext, Nasdaq OMX and Deutsche Boerse AG are each moving the markets they own in Europe and the U.S. to a single trading system to reduce costs. The multiyear technology initiatives are also intended to improve investors? access to different asset classes, boosting volume.
Limiting Costs
European equity markets are undergoing an overhaul aimed at spurring competition among exchanges and broker-operated venues and limiting costs for investors. Mifid, or the Markets in Financial Instruments Directive, is being updated by the European Union after it was adopted in 2007. Canadian regulators are also assessing trading rules.
The LSE already licenses TMX?s Sola trading technology for its EDX London derivatives venue under a partnership formed in March 2009, replacing a platform provided by Nasdaq OMX. Toronto-based TMX, run by Chief Executive Officer Thomas Kloet, operates the Montreal exchange, which developed Sola.
LSE, with average profit growth of 21 percent since 1999, is swapping stock priced at 6.6 times earnings before interest, taxes, depreciation and amortization for TMX shares that trade at an Ebitda multiple of 9, according to data compiled by Bloomberg. TMX?s annual income has risen 3.5 percent annually since 2000.
About 16 cents of every dollar LSE takes in as revenue is recorded as net income, according to the average since 2002 compiled by Bloomberg. At TMX, net margins have averaged 32 percent, the data show.
Larger Players
TMX is a ?highly profitable, good-margin business,? Jeff Fenwick, a financial-industry analyst at Cormark Securities Inc. in Toronto. ?The reality is, you either are going to have the opportunity to merge with someone on friendly terms that you know, or you can be a target for a much larger player that could come in on a hostile basis.?
The negotiations, following a decade-long wave of mergers among exchange companies, would unite two of the biggest venues for commodity producers. While energy and raw-materials suppliers make up 22 percent of the value of equities worldwide, they account for 36 percent of companies listed in the U.K. and 50 percent in Canada, data compiled by Bloomberg show.
LSE and TMX are discussing a merger four months after Singapore Exchange Ltd. offered to buy ASX Ltd., operator of Australia?s main bourse, for A$8.4 billion ($8.5 billion) in a cash and share deal that would create the world?s fifth-largest listed exchange company. Kloet was CEO of Singapore Exchange until December 2002.
?In today?s marketplace, especially if you are equity- centric, it?s a tough market out there,? said Sang Lee, co- founder and managing partner at research firm Aite Group LLC in Boston. ?At the end of the day, when they consolidate it makes it a little easier.?
--With assistance from Jeff Kearns in New York, Matt Walcoff, Doug Alexander and Sean B. Pasternak in Toronto and Greg Quinn in Ottawa. Editors: Chris Nagi, Nick Baker
To contact the reporters on this story: Nandini Sukumar in London at nsukumar@bloomberg.net; Nina Mehta in New York at nmehta24@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net.
To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; David Merritt at dmerritt1@bloomberg.net.
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