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The TMX Group logo, home of the TSX, in Toronto on June 28, 2013.Aaron Vincent Elkaim/The Canadian Press
Canada’s largest stock exchange operator is dramatically reducing its reliance on both Canada and the traditional stock exchange business with its latest billion-dollar acquisition.
TMX Group Ltd. X-T, which owns the Toronto Stock Exchange, TSX Venture Exchange, Montreal Exchange and TSX Alpha Exchange, announced plans late Wednesday evening to acquire the 78 per cent of VettaFi Holdings LLC it did not already own for US$848-million. TMX had acquired 22 per cent of VettaFi in early 2023 for US$175-million.
New York-based VettaFi has 113 employees and makes the majority of its revenue from its index business, which develops, calculates and maintains multiple indexes. Because that business earns money through licensing fees from passive fund managers and exchange-traded funds (ETFs) that track their indexes, much of its revenue – more than 80 per cent, according to TMX – is recurring.
The deal will boost the proportion of TMX revenue generated outside Canada to 46 per cent. The company’s market data business, which it refers to as global solutions insights and analytics (GSIA), will account for 41 per cent of total revenues once the deal closes early next month. Neither segment accounted for more than a third of revenue as recently as February, 2023.
TMX has long-term goals of generating more than half of its revenue outside Canada and having the same proportion come from its GSIA division, as it seeks to diversify away from the more volatile trading, clearing and settlement business.
The company first disclosed those goals in early 2023 and expected they would take a decade or more to achieve. However, TMX chief executive officer John McKenzie said in an interview Thursday that the timeline “will be faster” as a result of the VettaFi acquisition.
“This business is growing faster than the rest of our franchise,” Mr. McKenzie said. “Our ability to add more Canadian and more subscription revenue as VettaFi grows is going to accelerate our path to get there.”
While VettaFi currently generates roughly 98 per cent of its revenue outside Canada, Mr. McKenzie said part of the rationale for the acquisition was “to grow a bunch of new revenue with VettaFi in Canada, too.”
“It is going to help us grow the Canadian franchise because of our ability to help co-create new index products that we can provide to ETF manufacturers and then provide new potential investable products on the exchange,” he said.
Since TMX was able to “test drive” VettaFi through the minority stake it purchased earlier this year, Mr. McKenzie said, “we already have teams that are working together on potential new product designs, sales, lead generation and things like that, so we can hit the ground running in 2024 in a way you wouldn’t be able to in any other deal.”
The transaction builds off the success of Trayport Ltd., a London-based wholesale energy market trading platform that TMX acquired for nearly $1-billion in 2017. Trayport has been a key driver of revenue growth for TMX – both for its ability to raise prices for subscribers in Europe, where it is a dominant player, and for its capacity to expand into new markets such as North America and Asia.
Canadian Imperial Bank of Commerce analyst Nik Priebe said in a Thursday morning note to clients that TMX is paying a “somewhat healthy” price for VettaFi. However, Mr. Priebe also noted that Trayport was acquired using similar valuation metrics “and has arguably been the best performing element of the business mix since that time.”
Another way TMX plans to extract value from VettaFi is by utilizing the growing amount of data TMX produces to determine which new indices to build. For example, the largest index VettaFi currently maintains is the AMLP, which tracks energy infrastructure companies that make most of their money from midstream activities such as drilling and transportation. TMX can potentially leverage Trayport to create related products.
“We are going to look and see what is coming out of Trayport in terms of energy data that we could potentially create a new index off of,” Mr. McKenzie said. “This is a chance to mine the ecosystem of everything we produce from a data standpoint to see what is going to be useful.”
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