London Stock Exchange and Canada's TMX agree merger

(FT) -- Shares in London Stock Exchange surged almost 8 per cent on Wednesday after it agreed an all-share merger with TMX Group, operator of Canada's largest stock exchange, creating a platform with the world's largest number of mining company listings at a time of surging commodity prices.

The deal is the first big strategic move by Xavier Rolet, chief executive who took over from Clara Furse in 2009, to secure the future of the UK bourse.

However, in spite of the share price surge there were signs that some analysts were lukewarm on the deal. Citi described the deal as "defensive" and said it would distract the management from its earlier stated strategy.

"We worry that this deal looks likely to take up management time and energy in the short term. We see this putting the LSE's existing growth strategies on the backburner, which we view as a negative," the bank said in a note.

The combined group, which will have a dual stock market listing and be jointly headquartered in London and Toronto, will be worth just under £5bn ($7.7bn), including debt. It will have a combined 6,700 listings, making it the world's largest exchange by numbers of companies traded.

Mr Rolet is set to become chief executive of the merged group. Wayne Fox, chairman of TMX Group, would become chairman and Thomas Kloet, TMX chief executive, would be president. The chief financial officer of the enlarged group will be Michael Ptasznik, currently CFO of TMX.

TMX investors are to receive 2.9963 ordinary shares in the enlarged group for each share held in TMX. LSE shareholders will own 55 percent of the enlarged capital and TMX shareholders will take the remaining 45 percent.

LSE shares rose 68p or 7.6 percent to 960p, valuing the share capital at more than £2.5bn. TMX closed at C$40.28, giving Canada's largest exchange a market capitalization of C$3bn.

Based on the closing prices of the exchanges on Tuesday the combined company would have a market capitalization of about £4.2bn ($6.7bn).

The deal, which requires the approval from both provincial and federal Canadian authorities, where there are restrictions on an entity owning more than 10 per cent of an exchange, is expected to be earnings accretive for both LSE and TMX shareholders in the first full year following its completion.

The companies are targeting annual cost savings of £35m ($56.2) by the end of the second year of merger and a revenue boost of £35m in the third year of the combination growing to £100m ($160m) in the fifth year.

Mr Rolet welcomed the agreement with TMX and set out his ambition to become a leading global exchange.

"This new international leader, marrying the right cost structure, financial strength, technological expertise and product portfolio, will be strongly positioned to capitalize on growth opportunities in emerging markets and deliver them to our customers in North America, Europe and beyond."

He added: "We are aiming at nothing less than becoming a true powerhouse in the global exchange business."

Borse Dubai, LSE's largest investor, Italian bank shareholders UniCredit and Intesa Sanpaolo, as well as Qatar Investment Authority, which owns 15 percent of the LSE, favor the deal.

The deal is the latest in the sector which faces the growing threat of competition from alternative trading platforms such as Chi-X Europe and Bats Europe.

SGX, Singapore's exchange, agreed a $7.8bn bid to takeover Australia's ASX in January, to form Asia's fourth-biggest bourse. The deal valued ASX at 25 times its 2009 earnings. LSE trades at about 10 times earnings.

TMX shares have risen strongly on the back of consolidation hopes. The group's subsidiaries include the Toronto Stock Exchange and the Montreal derivatives exchange.

TMX also has a 19.9 percent stake in EDX London, a small derivatives exchange run by the LSE.

TMX markets itself as the world's leading resources market, but the LSE has also capitalized on the commodities boom.

Mining and energy companies account for 34 percent of the companies on LSE's benchmark FTSE 100 index, up from 29 percent three years ago.

TMX's main board and TSX Ventures exchange, which specializes in small-cap listings, have a combined 3,900 listings between them.