Quebec government pledges to block $1.76B Rona takeover
By LuAnn LaSalle | Jul 31, 2012 4:54 pm | 0 Comments

MONTREAL – Quebec is vowing to prevent a $1.76-billion bid for one of Canada’s largest home improvement companies by U.S.-based Lowe’s, which is expected to keep up the pressure to buy Rona despite having its offer rejected by the home-grown retailer.

Rona (TSX:RON) said Tuesday it refused the unsolicited takeover of $14.50 per share because it isn’t in the interest of its shareholders. The deal would have given Lowe’s a bigger foothold in Canada.

But the overture caught the attention of Quebec’s provincial government, which said it is vehemently opposed to the company falling into foreign hands, while powerful pension manager Caisse de depot et placement du Quebec promptly increased its stake in Rona.

“This transaction does not appear to be in the interests of either Quebec or Canada,” said Quebec Finance Minister Raymond Bachand.

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“Rona is a major player in Quebec’s economy, particularly in the manufacturing industry because of its extensive network of suppliers and strong links with many regional players across Canada.”

Tuesday’s public disclosure of the offer followed months of rumours that Lowe’s had Rona in its sights — rumours that only intensified after Rona announced the closure of a dozen warehouse stores in Canada earlier this year following disappointing results.

Rona said it received the offer on July 8 and told Lowe’s last week that it was rejecting the proposal. Lowe’s said it actually first approached Rona even earlier, including a previous proposal dated Dec. 15, 2011.

Rona stock rose as high as $14.49 a share Tuesday on the Toronto Stock Exchange but gave up some of the gains later in the session. The company’s stock closed at $13.50, up $1.63 or almost 14 per cent.

The relatively wide gap between Lowe’s offer and the market price suggests investors were uncertain that there will be a deal, given the negative response from Rona’s board and the Quebec government.

“The board believes that, in the best interests of Rona and its stakeholders, the corporation should remain focused on executing its business plan with a view to capturing significant opportunities that it sees for its business,” Rona said in a statement.

But Lowe’s apparently is prepared to keep knocking at the Canadian company’s door. It issued a statement that said institutional fund managers controlling about 15 per cent of Rona’s stock have expressed support for the acquisition.

By some definitions, Lowe’s public stance means it’s ready to make a hostile takeover bid — one that goes around the board of directors and directly to shareholders — although Lowe’s said it would prefer a friendly deal.

“We are disappointed that Rona’s board of directors has rejected our friendly non-binding proposal, which is clearly attractive for Rona shareholders,” said Robert Niblock, the chairman, president and chief executive of Lowe’s.

Rona is converting some of its big box stores to smaller ones with more personalized service as it faces stiff competition from U.S.-based Home Depot in Canadian markets.

Lowe’s believes a combination of the two companies makes “enormous” business sense and urged the board to reconsider its position in a news release.

Lowe’s said the acquisition would benefit Rona’s dealer-owners, employees, suppliers, customers and local communities and would also keep Rona’s headquarters in Boucherville, Que.

In expressing disapproval and stressing Rona’s importance to the domestic economy, the Quebec government said almost half of Rona’s purchases are made in Quebec, and almost 85 per cent in Canada.

“Its retail sales, including franchised, affiliated and other independent stores that make purchases from Rona, total in excess of $6 billion per year. Purchases from its suppliers amount to more than $2 billion a year in Quebec and more than $3.3 billion in Canada,” Bachand said.

The Quebec government has told provincial investment agency Investissement Quebec to examine ways to counter Lowe’s offer, including setting up a fund to defend Quebec’s interests. Bachand also said the Quebec government is prepared to work with Rona’s senior management team.

The Caisse increased its stake in Rona by two percentage points to 14.2 per cent Tuesday, and noted the economic benefits of Rona’s head office in the province.

“As a significant Rona shareholder, and on the basis of these criteria, the Caisse will follow very closely the evolution of this file as well as the performance of the company,” the Caisse said in a statement.

The powerful Caisse has acted before to protect interests it sees as vital to Quebec’s economy.

In 2000, the Caisse did not support a bid by Rogers Communications Inc. (TSX:RCI.B) to buy Quebec cable company Videotron and joined forces with Quebecor Inc. (TSX:QBR.B) to thwart the Toronto company’s bid.

Also Tuesday, Investment fund Fonds de solidarité FTQ voiced its support for keeping the company in Quebec hands.

“As a Rona Inc. shareholder, the Fonds de solidarité FTQ supports the Quebec company’s board of directors’ unanimous decision made public today to reject the unsolicited purchase offer made by U.S.-based Lowe’s,” the investment fund said in a statement.

The Fonds de solidarite FTQ has net assets of $8.5 billion as of May 31 and uses Quebecers’ savings to help the province’s economy grow.

RBC Capital Markets analyst Scot Ciccarelli said the acquisition could give Lowe’s size and scale in Canada, but questioned the timing and strategy behind the bid.

“In the U.S., Lowe’s has been fundamentally underperforming close competitor Home Depot in recent years,” Ciccarelli said in a research note.

He noted that Canada is currently about two per cent of Lowe’s business, while the country represents about eight per cent of Home Depot’s business. Lowe’s currently has a range of initiatives underway to close its performance gap with Home Depot, he added.

Ciccarelli said the acquisition of Rona, which he described as a “complex” company that has both big-box and smaller-sized stores as well as a distribution business, could prove to be a distraction for Lowe’s efforts to improve its U.S. operations.

“We believe investors would likely view the strategic timing of such an acquisition as a negative for Lowe’s,” Ciccarelli said.

Headquartered in Mooresville, N.C., Lowe’s has a small presence in Canada with only about 31 stores. Overall, Lowe’s has 1,745 stores in North America, mostly in the United States.

The first Canadian Lowe’s store was opened in 2007, several years after fellow American retailer Home Depot (NYSE:HD) already established a significant presence in Canada. Home Depot currently has 180 stores across Canada.

By contrast, Rona has more than 30,000 employees operating a network of nearly 800 stores under several banners as well as 14 hardware and construction distribution centres.