This is my first M&A analysis in this blog. This time I will analyse the merger of London Stock Exchange (LSE) Group plc and TMX Group Inc. I will talk about the background of the deal briefly before giving my analysis of the transaction.
LSE Group plc stated that this transaction would be a merger of equals. The stated benefits of the transaction are (1):
- the merged firm would be jointly head-quartered in London and Toronto with a roughly equal proportion of directors from both firms holding new positions on the new board
- businesses from both firms will have operational autonomy so that the centres of both firms would continue to have specialist roles, such as London for international listing of firms and Montreal for derivatives,
- the TMX Group businesses will continue to operate in Canada, the country will benefit economically and socially from the merger due to their centres of operation continuing to specialise in certain fields and jobs not moving abroad
- the strengths of both firms will complement each other to create a stronger and more diversified exchange group that will be able to complete even more effectively against the likes of New York Stock Exchange Euronext
- the combined group will be the financial market information leader providing a wide range of relevant products
- the users will be able to trade more types of assets including cash equities, fixed income and derivatives
- technologies will be shared to enable the merged firm to develop new products and systems even faster which will benefit users in terms of lower trading and capital costs, reduced spreads and increased certainty of trade execution
- competition between rival Canadian exchanges would be maintained for the benefit of clients
- the merged firm would be the global leading venue for natural resources, mining, energy, clean technology, international listings from emerging and growth markets, alternative market and in terms of the number of listings
- and the sales network from both firms will be combined so that they can distribute their products and services easier.
From my perspective, the merger between the two firms would benefit virtually all stakeholders from shareholders of both firms, governments of UK and Canada would benefit economically to users experiencing lower costs. As in all mergers and acquisitions transactions, some employees will lose their jobs and costs need to be reduced.
The analysis of the transaction is shown below:
Note that the exchange rate between the British pound and the Canadian dollar on the day of the announcement (9/2/2011) is 1.60121. This rate is used to calculate the value of LSE Group’s offer for TMX.
Looking at LSEs actual offer of 2.9963 LSE shares for each TMX share, equivalent of $42.25 per TMX share, the deal would overall represent good value for both LSE and TMX. If no synergies from the deal are achieved, LSE would lose a small value whereas TMX would lose significant proportion of its premium over the share price of $40.28 on 8/2/2011. The weighted average cost of capital (WACC) post-merger is 7.3%.
If LSE raised its offer to 3.1915 shares for each TMX share, $45 per TMX share, the deal would still represent a good value for both firms. However, LSE’s return will be worse whereas TMX’s has improved. If no synergies are achieved, than LSE would lose more value, in comparison to its actual offer, whereas TMX would still lose significant proportion of its premium. The premium at risk has increased slightly. From the post-market reaction analysis model, the post announcement premium at risk for TMX has fallen by almost 5%. The proportion of the merged company that TMX will own would increase to 46.7% whereas the proportion owned by LSE would decrease to 53.3%. WACC post-merger will fall to 7.2%.
If LSE matched any of the Maple Group’s offers for TMX, the deal would not represent a good value for LSE as the costs of the deal would outweigh the benefits. It does obviously represent a good deal for TMX in either of Maple Group’s offers. If LSE matched Maple Group’s original offer of $48 per share than the former would end up losing about 8% of its value and make a loss of about the same amount if the stated synergies are not realised. The firm would end up losing about a 10% of its value and make a loss of 10% under the same situation if LSE matched Maple Group’s revised offer of $50 per share. On the brighter side, the divergence between LSE and TMXs proportion of ownership will fall to 51.7% and 48.3% respectively, compared to the previous two deals mentioned earlier, if LSE matched Maple Group’s original offer. If LSE offered $50 per share, the proportion of ownership between the two will be almost equal.
Based on the analysis above, I believe LSE should offer 3.1915 shares for each TMX share, equivalent to $45 per TMX share. This is because this would;
- represent a good deal for both LSE and TMX in terms of the post deal returns, though LSE would have to sacrifice some proportion of it, they would achieve assuming the synergies are realised
- mean lower WACC post-merger
- proportion of ownership of merged firm would be more equal, better illustrating LSEs intentions regarding the merger
- and still benefiting virtually all stakeholders in terms of the contributing to the growth of the UK and Canadian economies, higher profit margins for the combined firm, better provision of products and services and lower costs for users.
I have provided the relevant excel documents that I have used to analyse the above deal and calculate the best possible estimate of WACC for LSE, TMX and the combined group:
- LSE-TMX merger using LSEs actual offer
- LSE-TMX merger using hypothetical higher actual offer from LSE
- LSE-TMX merger if LSE matched Maple Group’s original offer
- LSE-TMX merger if LSE matched Maple Group’s revised offer
- Calculation of weighted average cost of capital for each firm involved in the merger
- Management Information Circular TMX Group Inc. with respect to a proposed merger involving LSE Group PLC 25/5/2011 retrieved 19/7/2011
- TMX Group Inc. Annual Report 2010 retrieved 19/7/2011
- Digital Look (forecast of TMX) retrieved 1-8-2011
- Digital Look (forecast of LSE) retrieved 2-8-2011
- Google Finance (TMX share price) retrieved 1-8-2011
- Google Finance (LSE share price) retrieved 2-8-2011
- Bank of Canada retrieved 2-8-2011
- Bank of England retrieved 2-8-2011