LONDON/TORONTO The London Stock Exchange and Canada's TMX Group reported forecast-beating results on Friday as they applied for regulatory approval of their $3 billion deal to join forces.
Shares of the exchanges, both pressured by competition from alternative trading upstarts, rose after the results.
First-quarter profit at TMX, the operator of the Toronto Stock Exchange, rose 13 percent to C$64.3 million ($66.8 million), while revenue climbed 17 percent to C$174.7 million, on record volume and robust equity financing.
"I, along with maybe one or two others were already on the high end of Street estimates and they exceeded our estimates by a country mile," said National Bank Financial analyst Shubha Kahn.
The LSE exchange reported 2010 profit up 22 percent at 341 million pounds ($555.5 million), well above a forecast of 314 million in a poll of 14 analysts.
Revenue increased 7 percent to 675 million pounds, above analyst expectations of 651.1 million. The total dividend for the period was 26.8 pence, above a forecast 25.9p.
"We have seen strong growth in our fixed-income businesses, exchange-traded funds and derivatives. We are also starting to see positive impact from technology sales," Chief Executive Xavier Rolet told Reuters Insider TV in an interview.
The exchanges formally applied on Friday to have the deal approved by authorities in Ontario, Quebec, Alberta and British Columbia. The provincial regulators, along with the federal government, have a say in the deal first announced Feb. 9.
The applications initiate a process that could last for months -- the TMX and the LSE are confident it will close sometime in the fourth quarter.
The would-be partners promise to create a transatlantic exchange and powerhouse in mining and resource equity that would do $4 trillion in annual trading.
Canadian critics fret that control of a national institution will fall into foreign hands.
"We have made this investment because we are convinced this merger represents an unparalleled opportunity for our company," Chief Executive Tom Kloet said.
MARKET SHARE EROSION
But the market share of both firms has been eroding. The LSE's share of domestic equities trading -- historically its top earning business -- has slumped in the past three years, hurt by the likes of Chi-X Europe and Bats Europe, whose parent filed for an IPO on Friday.
Last month the LSE's domestic market share fell below 50 percent for the first time in the UK exchange's 210-year history, Thomson Reuters data showed.
The alternative trading platforms remain a formidable competitive threat to TMX as well.
The TSX and TSX Venture Exchange had a combined market share of about 65 percent by value and 68.8 percent by volume in the last quarter. Overall combined market share was down slightly quarter over quarter, according to data from the Investment Industry Regulatory Organization of Canada.
Both exchanges have tried to diversify business to counter the threat. Rolet has looked to derivatives trading, clearing and technology services for growth, and credited his strategy for the better-than-expected results. His boldest move is the proposed tie-up with TMX, a deal that will enable the UK exchange to tap into TMX's stable of booming mining firms.
TMX is in the process of launching its own alternative trading system, TMX Select. It has reduced fees and introduced rebates for certain services, and it launched services that allow for anonymous trading.
"If those initiatives bear fruit, it should offset some of the market share erosion, or at least stem some of the market share losses," said Khan.
LSE stock closed up 1 percent having risen more than 7 percent earlier in the session. TMX shares closed up 1.83 percent at C$41.75 late afternoon in Toronto, an implied premium relative to LSE's offer of $39.75, according to a CIBC research note.
(Editing by Sophie Walker, David Holmes)
($1 = 0.6140 pound)
($1 = $0.968 Canadian)