GMP sees the value in TSX topping bid

TSX / LSE Merger Part 21

GMP Securities has done some great work on the appeal of the topping bid for the Toronto Stock Exchange. Hit several of the nails on the head. Here’s the summary from their Research dept.:

We believe there is sufficient value to support $48 target

We believe the market is being too cautious when factoring in the offer from the Maple Acquisition Corporation. We doubt there are many politicians not willing to overlook monopoly issues in favour of choosing the Canadian solution. Second, the market has not factored in the removal of the TMX‟s biggest rival and the pricing pressures built into consensus figures. Third, we believe the valuation gap can be overcome with minimal revenue synergies. We believe that investors should be buying this stock ahead of further disclosure which will only narrow the stock to the bid.

The removal of Alpha should result in a higher P/E

Over the past 8 years, the TMX has traded an average of 16.0x forward P/E. Since the announcement of the creation of Alpha, the P/E has declined 5.0 multiple points. The peer group has declined as well but we believe the Alpha presence contributed at least 1.0x to 2.0x multiple points to that decline. The removal of that rival should at least increase consensus (no pricing pressure) and add a multiple point back to the stock. This would achieve our target price.

Adding synergies, Alpha and CDS bridges gap

We have attempted a rough analysis of the addition of Alpha and CDS using additional debt for the acquisitions. Based on our calculations, adding those two firms (and leverage) would bridge almost $10.00 of the $14.48 valuation gap. This is the difference between the $48.00 bid and cash component (or value of the Maple share). Revenue synergies of between $48 million and $76 million would be needed to bridge the additional gap of roughly $5.00. We believe this is easily achievable under a monopolist structure.

Being acquirer and not acquired is back on the table

Over the next several months if the TMX board determines this is a superior bid, it will be in a position to detail the growth plans outside of cost synergies. We believe this will be a key to selling this deal to shareholders. The TMX would have a quasiholding company structure where additional debt or equity can be added in the event of an acquisition. The TMX would be in a position to be the acquirer and not the acquired. We believe the discount on the stock to the bid is providing a compelling opportunity to buy a high margin, high ROE monopoly at a discount.

There is no change to our $48.00 target and BUY recommendation.

MRM