Canada exchange operator backs $3.8 billion buyout bid

TORONTO (Reuters) - The operator of Canada's largest stock market has thrown its support behind a C$3.8 billion ($3.8 billion) takeover offer from a group of banks and pension funds, embracing the deal four months after a failed attempt to merge with the London Stock Exchange.

TMX Group, which owns the Toronto Stock Exchange and TSX Venture Exchange for small-cap issues, said it would now urge shareholders to vote in favor of a once-hostile bid from the 13-member Maple Group.

The all-Canadian consortium was formed earlier this year to stop the country's exchanges from falling into foreign hands as part of a wave of consolidation, and to protect Toronto's status as a major financial center.

The current offer price and deal structure won't change, the companies said in a joint statement late Sunday. But Maple has agreed to the appointment of an independent chairman and other concessions related to corporate governance.

The most substantial factor in the new agreement is Maple's acceptance to an independent chair, which would have otherwise been investor group leader Luc Bertrand, said Chris Damas, a TMX shareholder and president of BCMI Research.

TMX shares rose more than 2 percent on Monday morning to C$43.37 a share. That is still well below Maple's C$50 offer price, reflecting regulatory uncertainty surrounding the deal.

TMX Group said it would back Maple in seeking the necessary approvals, including clearance from the federal Competition Bureau.

The proposal could raise objections because it would put the Toronto Stock Exchange under the same ownership as Canada's biggest alternative exchange, the Alpha Group. That would give the new company control of more than 80 percent of Canada's stock-trading market. Many of Maple's bank members are also owners of Alpha.

But TMX Chief Executive Tom Kloet insisted on Monday the deal would not force customers to pay higher trading fees.

Let me put it this way: I preferred the London deal to the Maple; I (now) prefer the Maple deal probably to no deal on a purely financial basis, said Thomas Caldwell, an outspoken TMX shareholder who had expressed reservations with the Maple bid.

GOVERANCE ISSUES

Maple's proposal, which has been extended to January 31, would create an integrated group offering trading, clearing, settlement and depository services for a broad array of financial instruments.

In addition to the appointment of an independent chairman, Maple agreed that more than half of the 15 members of the proposed board would be independent, consistent with current TMX governance rules. At least four of the current independent TMX board members would join the board of the new company.

The board will also include four nominees from Maple pension fund investors, at least one nominee from Canada's independent investment dealer community, four nominees from Maple bank-owned participating organizations and the chief executive.

Maple's members have also agreed to standstill agreements blocking them from raising their ownership in the exchange operator for five years after the deal's closing.

($1 = 0.997 Canadian dollars)

(Reporting by Euan Rocha and Pav Jordan in Toronto and Sakthi Prasad in Bangalore; Editing by Frank McGurty)