“We’re certainly not averse to” the Quebec government leading a counter offer, said Irwin Michael, a money manager in Toronto at IA Michael Investment Counsel, the third-biggest holder of Rona, with 3.65 million shares.
Three hours after Rona announced it had rebuffed Lowe’s unsolicited cash bid of C$14.50 a share, Quebec Finance Minister Raymond Bachand said the province may take steps to prevent a takeover by Lowe’s. Caisse de Depot et Placement du Quebec, a Montreal-based pension fund with a mandate to support Quebec businesses, and Rona’s biggest shareholder, raised its stake yesterday to 14 percent from 12 percent.
Bachand asked the province’s development corporation, Investissement Quebec, to examine actions to counter Lowe’s, which may include setting up a fund to “defend Quebec’s interests,” he said.
“This transaction does not appear to be in the interests of either Quebec or Canada,” he said in a statement.
Rona soared 22 percent to C$14.50 in Toronto yesterday, before falling back to close at C$13.50 after the Quebec government announced its opposition to the proposed sale. The one-day gain was the biggest on record. It closed up another 10 cents today at C$13.60. Lowe’s, which has already started acquiring shares of Rona, fell 5.6 percent in New York yesterday and closed 0.9 percent lower today at $25.14.
Bachand called Rona a “strategic asset” for the country because of the 30,000 people it employs and its network of Canadian suppliers. He told reporters on a conference call that Investissement Quebec could acquire a “small part” of Rona and lead a coalition of other shareholders opposed to the deal.
The Caisse de Depot bought its additional shares at an average price of C$14.17 to give it more leverage in the takeover battle and to profit if Lowe’s raises its bid, said Sachin Shah, a merger arbitrage strategist at Tullett Prebon Americas Corp.
“They’re betting the valuation is much higher than C$14.50 and they are also betting Lowe’s does the things necessary to get to the finish line,” he said by phone from Jersey City.
Rona, which operates Canada’s largest network with almost 800 of hardware and lumber stores, received the non-binding proposal on July 8 and the board rejected it unanimously, according to a statement. The offer is 22 percent higher than Rona’s closing price the previous day and values the Boucherville, Quebec-based firm at about C$1.76 billion. Even with yesterday’s gain, Rona is down 50 percent from its 2005 high.
“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 the statement.
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.
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. (BHP)’s $40 billion bid for Potash Corp. of Saskatchewan Inc.
Canadian Industry Minister Christian Paradis said yesterday there is no need for the federal government to review any bid for Rona Inc. by Lowe’s at this time.
“I am aware that Lowe’s has made a proposal that was rejected by Rona,” Paradis said in the statement. “There is therefore no investment to be reviewed under the Investment Canada Act at this time.”
Though Quebec would not have the power to directly block a bid for Rona, it can influence the federal government’s review, as Saskatchewan did in the Potash case. Quebec Premier Jean Charest is also expected to call an election as early as this week. The Globe and Mail reported the election call may come today.
“It’s not a surprising reaction, if you look at the history of Quebec’s position,” said William Polushin, a professor of international business at McGill University in Montreal. “It’s consistent with the idea that Quebec does try to identify wherever possible where it can support Quebec industry and do it Quebec’s way.”
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 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.
“We would not be surprised if Lowe’s increased its bid to accelerate expansion in Canada,” Alan Rifkin, an analyst at Barclays Capital Inc., wrote in a note to clients yesterday.
“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.”
Lowe’s said the CEOs of the two companies first met 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.