Landmark market merger awaits Tony's tweet

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The Gazette, Wednesday, February 16, 2011

In the quarter century since the creation of Investment Canada by the Mulroney government, only two foreign takeovers of Canadian companies have been turned down by Ottawa: the proposed sale of MDA aerospace to the U.S. in 2008 and the hostile bid by BHP Billiton of Australia for Potash Corp. of Saskatchewan in 2010.

In the first instance, then-industry minister Jim Prentice declared that the sale of the country's premier aerospace firm failed to meet "the net benefit" test of Investment Canada.

In the second, Industry Minister Tony Clement solemnly declared that potash is a "strategic resource," Canada having about half of the world's supply in the ground in Saskatchewan.

What is a "net benefit?" What is a "strategic resource?" Perhaps Tony will tell us on his Twitter account.

It's a bit like watching for the puff of white smoke at the Vatican -you don't know what's going on in the conclave; you're just informed of the outcome.

Both deals were killed by a Conservative government, which would normally have a pro-market bias. Now a third deal is under review: the proposed $7-billion merger of the Toronto and London stock exchanges. If this deal is turned down, what kind of signal will that send to the world of Canada being open for business, and a good place to invest?

It's billed as a "merger of equals" between the TMX and the LSE, but it turns out that London would be more equal than Toronto. While the combined exchange would have offices in both cities, the LSE would own 55 per cent of the equity, to 45 per cent for the TMX. The CEO would be based in London, while the president and CFO would be in Toronto. London would have eight seats on the board, while Toronto would have seven. With a majority of shares and seats on the board, the combined exchange would be controlled from London.

"A complex transaction," Stephen Harper said, kicking it over to Clement, who on Monday said the deal would have to meet the net-benefit test, though he didn't quite have the nerve to call the TMX a strategic resource.

There are also regulatory obstacles to be cleared at the provincial level in Quebec and Toronto. The Ontario and Quebec securities commissions must approve any transaction that gives any party more than 10-per-cent ownership of the TMX, which owns the Toronto and Montreal exchanges, as well as Calgary and Vancouver. Well, London will own 55 per, while the largest single shareholder, with 11 per cent, would be Sheik Mohammed bin Rashid Al Maktoum, the ruler of Dubai in the United Arab Emirates. Incoming!

In both Quebec City and Queen's Park, the provincial finance ministers have put down markers, calling for hearings. Well, at least the LSE's CEO Xavier Rolet, being from France, can testify at a Quebec parliamentary commission in French. The Montreal Exchange is a derivatives market, and London is also in that space, so something will have to give if the listings are combined.

In Ontario, Finance Minister Dwight Duncan said bluntly: "Control will be with the other side." He also invoked the spectre of Ottawa blocking large bank mergers a decade ago. "Thank goodness they didn't merge," he said. "Otherwise we may have experienced what happened in other markets."

Of course, the financial meltdown had nothing to do with mergers, and everything to do with U.S. and European banks peddling junk in the real-estate market, but sometimes there is no accounting for the nonsense spoken by politicians.

So even if Ottawa is inclined to approve the TMXLSE deal, it faces a steep political path in the two provinces. This is why they have communications consultants and government-relations guys.

There are lots of reasons to be in favour of the transaction, as the Toronto Star's David Olive wrote in his business column last Tuesday -including the fact that the combined exchange would be the eighth-largest in the world, with "more listed companies than any other bourse."

There are also lots of reasons to oppose it, as the same writer did last Friday, declaring that "a Canadian loss of control of its own markets makes this deal dead." For good measure, a headline asked "why would we let Brits take over?" It was the intellectual flip-flop of the week. Of course, you can always count on the Star to toot the horn of Canadian nationalism.

But at the end of the day, the question around approval or disapproval of the deal is one of transparency. A "net benefit" is what Ottawa says it is, with no further explanation. As for "strategic resource," it remains undefined. We await Tony's tweet.

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