UPDATE: Independent Adviser Says LSE-TMX Deal "Superior"

Glass Lewis & Co, an independent adviser to institutions, has recommended that shareholders vote for a merger between Canadian exchange operator TMX Group Inc. (X.T) and U.K. peer the London Stock Exchange Group PLC (LSE.LN), judging it as "superior" to Maple Group Acquisition Corp.'s counter takeover bid.

The adviser said its recommendation was a result of the "strategic merit" of the proposed transatlantic tie-up with LSE, as "the rapidly consolidating exchange industry has all but forced companies to combine in order to compete."

However, Maple quickly retorted, saying that Glass Lewis' conclusion and part of the analysis in its report is "deeply flawed."

The report from Glass Lewis is especially significant because the adviser is an indirect wholly owned subsidiary of Ontario Teachers' Pension Plan Board, one of the key founders and backers of Maple.

Glass Lewis says on its website that it maintains its independence from OTPP by excluding OTPP from any involvement in the making of Glass Lewis' proxy voting policies and vote recommendations.

Maple's bid is meant to upset a merger deal struck between TMX and LSE in February. TMX and LSE shareholders are due to vote on the deal later this month. TMX needs a two-thirds vote and the LSE needs a majority vote to carry on with the deal.

Glass Lewis said it recognized "complementary business lines" between TMX and the LSE and relied on their "projections of revenue and cost synergies." The adviser added that it thought "LSE's proposal is superior to Maple's competing offer for TMX" and "the proposed merger... is in the best interest of shareholders."

The value of the LSE-TMX deal is around C$47 a share, based on current share prices.

Glass Lewis said the LSE-TMX merger is "reasonable" and that the combination of the strong brands of TMX and the LSE will result in "a larger, financially stronger company with increased scale and reach."

As part of Maple's counterbid, it plans to merge TMX with Alpha Group, an alternative-trading platform owned by Canada's big banks, and with CDS Inc., Canada's equity and fixed-income clearing house.

Glass Lewis said Maple's plan is "unconventional" and would rely on increasing debt financing, which means TMX's debt levels would rise to about 2.9 times earnings before interest, tax, depreciation, and amortisation of goodwill, up from 1.1 times currently. It could rise further to 4 times Ebitda with the purchase of Alpha and CDS.

"One of the largest unknowns is whether or not Canadian regulators would approve Maple's combination from a competition standpoint," Glass Lewis said.

It is estimated that combining TMX with Alpha would give Maple around 90% markets share in Canadian equities-trading volume.

Glass Lewis said an LSE-TMX merger "is by no means a sure thing" but it "has a greater probability of obtaining all necessary approvals."

Among its arguments against the report, Maple said that Glass Lewis "does not mention, and appears to give no weight to, the extraordinary condition of the LSE offer which requires provincial securities regulators in Quebec and Ontario to abandon a key Canadian public interest protection limiting any one shareholder from owning more than 10% of TMX Group."

Maple said the report didn't mention Quebec Premier Jean Charest's recent comments to the media, with him saying: "We would much prefer to see ownership in the hands of the Maple Group."

Maple said Glass Lewis "appears to ignore" recent information that even after supposedly being bought by Maple, TMX "would continue to have an investment grade profile and would have the cash flow and capacity to de-lever to 2 times Ebitda within two years."

A combined LSE-TMX board will have seven TMX directors and eight LSE directors.

Maple said Glass Lewis didn't say in its report that "the assurances of TMX board representation largely expire after four years."

On Tuesday, Maple received approvals from Canada's securities regulators to structure its takeover bid as a two-step process. The approvals allow Maple to initially acquire 70% of TMX's shares for C$48 each in cash, and then acquire the remaining 30% by exchanging each TMX share for one Maple share. TMX shareholders would own 40% of the resulting public company.

Earlier Friday, Canada's Globe and Mail newspaper quoted LSE Chief Executive Office Xavier Rolet as saying the exchange was "reviewing" its bid for TMX amid speculation that a sweeter offer will be needed to gain support from shareholders. However, a person familiar with the matter said that this was merely part of a constant review given the two competing offers.

Maple is urging TMX shareholders to vote against the proposed LSE transatlantic tie-up. It plans to pursue the combination of TMX with Alpha Group, an alternative-trading platform owned by Canada's big banks, and Canada's equities clearinghouse as soon as possible following the acquisition of TMX.

However, TMX's board has opposed Maple's bid as not offering enough of a takeover premium. It also believes the deal will saddle TMX with too much debt. TMX and LSE say their proposed tie-up is superior since it gives the two exchanges global stature amid a wave of consolidation among exchanges.

At 1500 GMT, LSE shares were up 0.8% at 947 pence, giving the company a market capitalization of just over GBP2.55 billion, in an overall higher market.

-By Michael Haddon, Dow Jones Newswires; 4420-7842-9289; [e-mail]