Lowe’s Losing Like BHP as Foreigners Repelled
Lowe’s Cos Inc. (LOW)’s withdrawal of a bid for Rona Inc. (RON) amid opposition from the Quebec government threatens future foreign investment as the Canadian province seeks funds to develop its northern natural resources.
Lowe’s withdrew its unsolicited offer for the home improvement retailer on Sept. 17 after Rona rejected requests to proceed with a friendly deal, the Mooresville, North Carolina- based firm said in a statement. Rona, based in Boucherville, Quebec, fell 12 percent, its biggest one-day loss.
The “strong political agenda” of protecting companies in the primarily French-speaking province means investors looking to profit from a takeover may be out of luck, said Jeff Burchell, a Toronto-based money manager at Aston Hill Financial Inc. (AHF), which manages about C$6 billion ($6.15 billion) including Rona shares. This poses a problem for Quebec mining exploration and development companies, he said.
“A lot of the resource plays in Canada are built on the idea of you building up the resource then selling to a developing country,” Burchell said by telephone. “But if that’s the story and it’s Quebec-based, I’m not buying stock in that company.”
Lowe’s retreat comes as the federal government considers a $15.1 billion offer for Nexen Inc. (NXY) from Chinese state-owned firm Cnooc Ltd. (883) and less than two years after the government quashed BHP Billiton Ltd. (BHP)’s $40 billion hostile bid for Potash Corp. of Saskatchewan Inc., after intense opposition from Saskatchewan Premier Brad Wall.
While Alberta Premier Alison Redford has said foreign investment is good for the oil-rich province and Potash was only the second rejection of a foreign takeover by the federal government in 25 years, Quebec Premier Pauline Marois has vowed to protect companies from hostile takeovers and keep head offices in the province.
Marois, elected to lead a minority government on Sept. 4, pledged during the campaign to amend business laws and create a C$10 billion “strategic investment fund” -- managed by the Caisse de Depot et placement du Quebec, the provincial pension fund manager -- to help protect homegrown companies. The Caisse, which oversees about C$166 billion, bought shares in Rona after the Lowe’s takeover bid, raising its share by about 2 percentage points to 15 percent. Marois will name her cabinet at 4 p.m. today, according to a Quebec government statement.
Sebastian van Berkom, president of Montreal-based Van Berkom and Associates, a fund manager with C$1.8 billion in assets, said Quebec’s reputation is at stake in the aftermath of the broken Rona-Lowe’s deal.
“I hope that Pauline Marois and the Caisse don’t respond by trying to save all these underperforming Quebec companies, because then we’ll get a reputation that we’re out to save the weak and not interested in creating wealth,” he said in a telephone interview. ’’I would be very disappointed if Quebec is perceived that way.’’
Rona has declined 48 percent in the past five years, four times more than the drop in the Standard & Poor’s/TSX Composite Index over that period. The stock was little changed at C$11.23 at 9:53 a.m. in Toronto for a market value of C$1.36 billion, down from Lowe’s bid of C$1.76 billion.
Julie Yenichek, a spokeswoman with Lowe’s, said the company wouldn’t comment on specific discussions it had with Rona, including whether management met with representatives from the provincial government.
“We will continue to evaluate our options,” she said in a phone interview from Mooresville.
Valerie Lamarre, a spokeswoman for Rona, said in an e-mail the company’s focus remains on implementing its business plan.
Louis Hebert, a management professor at HEC Montreal, said Lowe’s and other foreign companies looking for an acquisition must satisfy shareholders as well as the provincial government, opposition parties, and the Quebec population.
“This is probably going to have a chilling effect,” Hebert said by telephone. “Companies that want to come here are going to need to do their homework before they bid for a Quebec company.”
Raymond Bachand, Quebec’s outgoing finance minister, said he was “very happy” that Lowe’s was pulling its bid because of Rona’s importance in the Quebec economy.
“Rona is one of our national champions,” he said in a Sept. 17 interview on Quebec’s Argent television network. “There are 50,000 people in Quebec who depend on Rona, whether they work for the company or for its suppliers. We need this head office in Quebec.”
Rona’s fate is a sensitive issue in Quebec because some companies that were based in the province, such as aluminum maker Alcan Inc. and Montreal Exchange Inc., were acquired in the last decade, said Karl Moore, a management professor at McGill University’s Desautels Faculty of Management in Montreal.
Quebec’s opposition to the deal was “the biggest hurdle,” he said. “There have been a number of head offices leaving Quebec, so it’s a touchy issue that the PQ will continue to respond to.”
Other Quebec companies such as drugstore company Jean Coutu Group Inc. of Longueuil, Laval-based Alimentation Couche-Tard Inc. and Montreal-based Dollarama Inc. may also be considered strong provincial brands.
Former Premier Jean Charest unveiled the so-called Plan Nord in May 2011, promising C$80 billion of government and company investments by 2036 to tap mining and energy resources in an area twice the size of France.
Marois criticized the plan during the campaign for leaving too much profit in company hands. According to its electoral platform, the Parti Quebecois would introduce a 5 percent minimal royalty on the gross value of all mining output, in addition to a 30 percent tax on “super profits” from non- renewable resources.
“If other capital providers are nervous and are staying away, that says to a mine developer like me that projects will be cheaper, valuations will be lower,” said Brian Tobin, chairman of Marret Resource Corp. (MAR), which invests in natural resource debt securities. “If others are nervous and the consequence of that is a greater field for me to play on, I’m happy with that.”
Tobin, a former premier of Newfoundland and Labrador, was chairman of Montreal-based Consolidated Thompson Iron Mines Ltd. when the company closed a $4.9 billion deal with U.S. miner Cliffs Natural Resources Inc. last year. He has met Marois while in politics and called her a “pragmatic” politician.
“I expect she’ll bring the same sense of pragmatism to the office of the premier,” he said. “I don’t see the Parti Quebecois doing things that will mean the loss of capital or jobs in Quebec.”
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