TSX sells, Canada sold down the river

NationalPost.com – FinancialPost.com
February 19, 2011.    Diane Francis

The proposed takeover of the TSX Group is unacceptable and would injure Canada’s competitive advantages.

The TSX Group Inc. is not just a public company with an equity and derivatives business that trades and raises capital for public companies. It is the linch pin to the nation’s mining industry and, therefore, to the country’s future.

It’s ironic that as politicians ponder this deal, up to 30,000 people from dozens of nations are about to descend on Toronto from March 6 to 9 for the annual Prospectors and Developers Association of Canada confab, the world’s biggest mining conference. They are coming because this is the world’s mining mecca. They are not on their way to Sydney. Or London. Or Rio de Janeiro Or New York. Or Hong Kong.

Canada owns the world’s smartest mining infrastructure which consists of specialized brokers, underwriters, bankers, money managers, investors, accountants, lawyers, engineering firms, geophysical scientists, suppliers, mining contractors, junior companies, geologists, manufacturers and companies. Consider its stature:

The TSX is the top exchange to invest in mining in Africa.

The TSX is the top exchange to invest in Latin America (not Brazil or Mexico).

The TSX is the go-to exchange for mining and despite its specialization is the sixth largest exchange in the world by equity of all kinds raised.

The TSX is the number one exchange in North America in the number of issuers or listed companies.

The TSX is the second largest exchange in the world in terms of issuers.

The TSX lists 55% of the world’s public mining companies

The TSX lists 35% of the world’s public oil and gas companies

The TSX has captured on average 80% of the world’s mining financings

The TSX has raised 36% of total equity globally

Meanwhile, London is on the downstroke with de-listing problems and mining listings pour into the TSX and derivatives are growing nicely. The deal is not only lousy but should never have been negotiated in the first place.

It is also insulting to bill this as a merger (London shareholders get 55% of the combined entity and most board seats, TSX 45%) and insulting to regulators because it contravenes a 10% ownership limit pledge made by the TSX in 2008 to the Ontario Securities Commission.

The 10% limit must be waived but should never be. The restriction was there at the insistence of smaller jurisdictions in Canada, but any entrepreneur can see that it represents a strategic advantage which should remain inviolate for two reasons: To protect the equity and derivatives exchanges from outside marauders; and, more importantly, to help it take over other exchanges with desirable assets without fear of being taken over itself. In other words, the limit allows the TSX should be eating, not being eaten.

Also, if the 10% rule is waived for a London-TSX deal, the promises about joint head offices, board seats and Canadian oversight are worthless. These two will be immediately gobbled up by the hegemons in Europe and Asia that are forming.

From a nation-building viewpoint, therefore, the TSX is not an exchange. It’s the epicenter of Canada’s best opportunity going forward as the world’s pre-eminent mining and energy exchange at the outset of an unprecedented commodity super-cycle.

Put bluntly, its sale would forego the fact that the TSX, with the right managers and strategy, will likely dwarf the London and most other exchanges in a handful of years.

Finally, there is absolutely no business case behind this punt. Consolidations underway among exchanges are a race to the bottom, driven by a shrinking market due to poor management and lousy technology despite booming equity sales. These deals are faddish and not rooted in meeting investor needs because investors can buy stocks anywhere in the world anytime they wish.

Worst of all, these deals are certainly not driven by the needs of those listed companies who are an exchange’s, and nation’s, most important stakeholders because they build economies.

“London listing fees are double if not triple Toronto’s and rules will be more onerous and restrictive,” commented one mining CEO. Another said: “Investors have no problem trading on the TSX or finding Canadian stocks and a listing in London would require more marketing costs, and more red tape, which are another burden to companies.”

Canada’s corporations, and mining companies from around the world listed on the TSX, will be poorly served with gigantism: London listings are two to three times more expensive and companies will fall through the cracks instead of being babied and nurtured by the specialized Canadian financial industry.

By staying out of the frenzied rush to consolidate exchanges, the TSX will benefit from an eventual flight to exchanges that are specialized, cheaper and unburdened by unneeded and multiple regulatory regimes.

Frankly, the whole proposal is insulting and foolish. If you don’t think so, ask the 30,000 mining experts and deal makers who are headed to Toronto because it’s the mining capital of the world.

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