It was surprisingly smooth sailing in Quebec for the TSX Group Inc.’s $1-billion takeover of Montreal Exchange Inc. after early indications the deal might founder in la belle province.

After winning approval from Quebec’s securities regulator, the Autorité des marchés financiers, the transaction is set to close on May 1, creating the TMX Group Inc. The transaction brings together stock and derivatives trading in the same company and ends the MX’s 133-year history as an independent exchange.

Strong opposition to the takeover in Quebec never materialized, despite early signs the powerful Caisse de dépôt et placement du Québec, the province’s giant public pension manager, and nationalist forces might put up a fight.

Indeed, there was no small irony in an embarrassing gaffe that saw the Caisse actually beat the AMF to the punch in announcing the regulator’s decision to approve the deal. As a result of a mix-up, the Caisse issued a press release welcoming the AMF’s decision before the AMF had even made it official.

It was a different story when the the TSX and MX announced the deal on Dec. 10. Back then, Caisse CEO Henri-Paul Rousseau questioned whether the merger was “ultimately viable,” given the stiff competition the TSX is facing from U.S. exchanges for trading in interlisted stocks as well as from private electronic stock-trading platforms in Canada.

But the Caisse, which owns about 8% of the MX’s stock, ended up supporting the deal at two days of public hearings held by the AMF in March. Still, Canada’s largest institutional investor did call on the AMF to force the TSX to strengthen guarantees that derivatives activities would remain and grow in Montreal.

The strongest voice of dissent came from former premier Jacques Parizeau, who expressed his dismay that the titans of Quebec Inc. had all lined up behind the deal.

During the hearings, AMF president Jean St-Gelais expressed concern about imposing stringent conditions on the transaction. He speculated that the TSX might use a tough decision as an “easy exit” from a deal that was made at the top of the market for exchange stocks, and at a time when the MX’s results were deteriorating.

At the hearings, Rousseau admitted he, too, was concerned that the deal was more “fragile” than it had been on Dec. 10.

“I’m being realistic in saying you can improve this transaction,” Rousseau told St-Gelais. “But I’m relying on your judgment in finding the right balance.”

Later, in announcing the AMF’s favourable decision, St-Gelais said he was satisfied with assurances that the MX’s derivatives business will remain in Quebec. But, he adds, the regulator will be vigilant in making sure those promises are kept. “The AMF has the capability to intervene,” he says, “if the commitments taken as part of this combination are not respected.”

The AMF opted not to impose stringent new conditions on the transaction in order to leave the merged company with sufficient flexibility to carry out its business and because it’s easier to enforce general principles, St-Gelais says.

He adds that the AMF was successful in extracting significant commitments from the TSX Group.

First among these is a veto the AMF will hold over ownership of the TMX. No one will be able to acquire more than 10% of the company without the AMF’s approval. St-Gelais says the AMF had insisted on the insertion of that clause into the merger agreement between the time the deal was struck and when it was publicly announced.

As well, the TMX won’t be able to sell a controlling stake in the MX to another party without the AMF’s approval. The TMX will also have to provide the MX with adequate resources and provide the AMF with an annual strategic plan for its derivatives products.

In the merger proposal, five of 18 directors are to be appointed by the MX for the first three years after the merger and 25% of directors are to be permanent residents of Quebec.

The merger ends a dangerous game of chicken between the two exchanges. Both had signed partnership agreements with large U.S. exchanges and were heading toward direct competition in derivatives when a non-compete agreement between them expires next March.

The two companies have argued that together they will be better able to meet international competition in an industry in which consolidation is proceeding at a break-neck pace. They have targeted $25 million a year in cost savings as a result of the merger. IE