Rona, which operates Canada’s largest network with almost 800 of these stores, received the non-binding proposal on July 8 and the board rejected it unanimously, according to a statement today. The offer is 22 percent higher than Rona’s closing price yesterday and values the Boucherville, Quebec-based firm at about C$1.76 billion.
Rona would be Lowe’s biggest takeover, allowing the retailer to accelerate its expansion in Canada, where it has opened 31 stores since 2007 to compete with Rona, Canadian Tire Corp. and Home Depot Inc. (HD) of Atlanta.
“Our interest is to do a friendly transaction and look for a way to create a proposal that fits the needs of their stakeholders and ours,” Doug Robinson, Lowe’s head of international operations and development, said by telephone today from Montreal.
Lowe’s, based in Mooresville, North Carolina, said in March it envisioned operating more than 100 stores in Canada, trailing competitor Home Depot, which has 180 stores in the country.
Robinson, 53, said Lowe’s is making the case that the transaction makes sense for both companies and is counting on Rona investors to “share their views” with Rona’s board. Lowe’s said institutional shareholders representing 15 percent of Rona’s outstanding shares have indicated support for the proposal, though Robinson declined to identify which investors.
Rona rose 15 percent to $13.64 at 2:05 p.m. in Toronto, after earlier rising as much as 22 percent, a record intraday gain. Lowe’s, which has also acquired shares of Rona, fell 5 percent to $25.49 in New York, for a market value of $30 billion.
Quebec Finance Minister Raymond Bachand said he has asked the province’s development corporation, Investissement Quebec, to examine actions to counter Lowe’s offer. This could include setting up a fund to “defend Quebec’s interests.”
“This transaction does not appear to be in the interests of either Quebec or Canada,” he said in a statement.
The federal government in Canada has the power to block takeovers under the Investment Canada Act unless they provide a “net benefit to the nation.” In 2010, Prime Minister Stephen Harper’s Conservative government blocked BHP Billiton Ltd.’s $40 billion bid for Potash Corp of Saskatchewan Inc.
Lowe’s Robinson said “the lines of communication are wide open” with the Quebec and Canadian governments, and they are interested in “friendly negotiations.”
Robinson said the takeover bid involved combining its Canadian business with Rona’s headquarters in Boucherville, Quebec, and maintaining Rona’s Canadian employment. He said those concessions don’t detract from the transaction because Lowe’s is looking to expand into Rona’s home base of Quebec, where the U.S.-based retailer has no stores.
Caisse de Depot et Placement du Quebec, Canada’s second- largest pension fund and Rona’s largest shareholder, released a statement today saying it would balance value creation for its depositors and shareholders with its mandate to support Quebec businesses. It stressed the importance of keeping Rona’s head office in Quebec, the development of the company’s supplier network in the province and the interests of Rona’s franchisees.
The Montreal-based fund said today it increased its stake in Rona to about 14 percent from 12 percent, adding 2.43 million shares at an average price of C$14.17 a share.
The Canadian home-improvement retailer’s shares previously surged on April 3 after Lowe’s Chief Financial Officer Robert Hull called it “a very interesting company” in an interview with Reuters and said the U.S. retailer would consider “all options” if Rona put itself up for sale.
“The management of Rona has been disinclined for awhile now to accept this transaction,” said Jonathan Brodsky, who helps manage $9.5 billion at Advisory Research Inc., by phone from Chicago. “The provincial government of Quebec has indicated that it’s reviewing the transaction as well. So of course we’re looking to a higher bid but we recognize there are issues to overcome.”
Brodsky, whose firm owns Rona shares, said the price doesn’t take into account Rona’s brand or operations, and could go higher.
Rona reported a C$10.9 million loss in the first quarter after a net loss of C$78.4 million for 2011. In February, the company announced plans to turn itself around by shifting away from the big-box format to smaller stores, an overhaul of its online presence and plans to develop its business supplying contractors and professionals.
“Hopefully the turnaround strategy starts to work but at the same time, while you’re waiting for that here you get a takeover offer which perhaps mitigates the risk of the strategy not working or taking longer,” said Irwin Michael, a money manager at IA Michael Investment Counsel, who holds 3.6 million Rona shares through various funds, by telephone from Toronto.
Standard & Poor’s Financial Services said it was putting Rona’s BBB- rating on credit watch “with positive implications,” and would bring Rona’s rating in line with Lowe’s should the deal go through.
Lowe’s said the CEOs of the two companies first met a year ago on July 27, 2011, at Rona’s request. Lowe’s made a proposal to acquire Rona on Dec. 15, 2011 that was rejected by Rona’s board.
Rona hired Scotiabank and BMO Capital Markets as financial advisers and Norton Rose Canada LLP and Davies Ward Phillips & Vinberg LLP as legal advisers. CIBC and Bank of America Merrill Lynch are working with Lowe’s.
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