Nymex's deal with Montreal a threat to TSX
BOYD ERMAN
00:00 EST Thursday, February 15, 2007
The Montreal Exchange is yet again sending signals that it has little interest in merging with TSX Group Inc. to form an all-Canadian stock-and-derivative market, this time by teaming up with a top U.S. exchange to go head to head with TSX in the business of trading energy contracts.
Nymex Holdings Inc., which owns the New York Mercantile Exchange, is buying a 10-per-cent stake in the Montreal Exchange for about $80-million and the two companies together will open a business in Calgary that will offer trading and clearing for trades in futures and options on oil, natural gas and electricity. The move targets the TSX's NGX business, which offers trading in natural gas and power.
The partnership with Nymex, the world's biggest energy exchange, rekindles expectations that the Montreal Exchange will try to go alone or find a non-Canadian partner rather than merge with the TSX, something the TSX would like.
So far, feelers from TSX Group's chief executive officer, Richard Nesbitt, have found a dismissive reception from Montreal Exchange CEO Luc Bertrand. Mr. Nesbitt wants to be able to offer investors the ability to use the same exchange to buy stocks, his exchange's specialty, and derivatives such as futures and options, which became Montreal's bailiwick under a 1999 non-compete agreement. Mr. Bertrand's lack of interest has left Mr. Nesbitt searching elsewhere for a partner to help build a derivatives business for TSX Group. "With these moves, we believe that MX is once again demonstrating its unwillingness to discuss a partnership with TSX Group and increases the likelihood of Canada having two competing derivatives exchanges in March of 2009 [when the non-compete agreement expires]," said analyst John Aiken of Dundee Securities.
Derivatives trading has been growing much faster than trading in stocks, and as a result shares of derivatives exchanges have been outpacing those of stock exchanges. So each day that Mr. Nesbitt waits to do a deal, it gets more expensive for him to buy his way into the derivatives business.
The value of the Montreal Exchange has been soaring and now is around $900-million, based on the $88 a share that Nymex is paying for its stake. The Montreal Exchange plans to list its shares, which so far have only traded on a grey market, on the TSX in coming months.
By contrast, TSX Group shares slumped $2.32 yesterday, or 4.5 per cent, to $49.72, leaving them about where they were a year ago.
Richard Schaeffer, the chairman of Nymex, wouldn't say on a conference call yesterday whether his company would like to buy more of the Montreal Exchange -- something that is currently impossible because of a 10-per-cent cap on any one shareholder's stake.
Mr. Schaeffer said he expects the first stages of the energy market to be open within a couple of months, with the two partners splitting any profit 50-50. The market may also expand to trading of contracts on metals and so-called soft commodities, which include grains.
"The cost will be minimal," he said. "The profits will be swift."
Any encroachment on the TSX's energy trading business, which makes up only a small fraction of the company's profit, is a minor issue compared to the signal that the Montreal Exchange is sending with its plan, Mr. Aiken said.
"MX appears to be willing to aggressively compete against TSX in its established markets, beginning competition between the two Canadian exchanges, even before the non-compete contract on non-energy derivatives expires," he said.
TSX Group got into the energy-futures trading business with the 2004 purchase of NGX, and it paid $5-million to the Montreal Exchange to gain an exemption for energy from the non-compete agreement on futures.
The fact that Nymex partnered with Montreal is also a blow, given that last year there were reports that the Nymex was in talks with TSX Group to team up and bolster the NGX business and to prepare to offer a combined stock and derivative market. The reports, which appeared in The Wall Street Journal, were never confirmed by the companies.
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