Lowe’s Cos.’s unsolicited pursuit of home-improvement retailer Rona Inc. has become an election issue in Quebec as lawmakers fight to preserve jobs in what was once Canada’s economic hub.
The governing Liberal Party and the opposition Parti Quebecois, which is leading in opinion polls for the Sept. 4 vote, have pledged to shield Quebec businesses from foreign takeovers after Rona rejected an offer from Mooresville, North Carolina-based Lowe’s. Quebec Finance Minister Raymond Bachand, a former venture capitalist, called Rona a “strategic” asset for Quebec because of its supplier network and 15,000-strong provincial workforce.
Quebec’s unemployment rate exceeds the national average, while economic growth and worker productivity trails. Its largest city, Montreal, has lost more corporate headquarters than any other business center in the country.
“You’re seeing a clear nationalist awakening in this election,” said Louis Hebert, a management strategy professor at HEC Montreal, who co-leads the business school’s joint executive MBA program with McGill University. “We don’t have too many world-class companies in Quebec. Every time we develop one, it seems like it runs the risk of being eaten.”
While Quebec wouldn’t be able to block a bid for Rona, a power that rests with the federal government, it may influence the national debate. Saskatchewan Premier Brad Wall opposed BHP Billiton Ltd.’s $40 billion bid for Potash Corp. of Saskatechewan Inc., which in 2010 became only the second takeover to be formally rejected by Ottawa in 25 years.
Parti Quebecois leader Pauline Marois, a former finance minister, promised to create a C$10 billion ($10 billion) strategic investment fund -- to be run by the province’s public pension fund manager, the Caisse de Depot et Placement du Quebec -- and amend the province’s Business Corporations Act to make it easier for homegrown companies to fend off hostile takeovers. She also pledged to make the Caisse, which runs about C$166 billion, invest more in Quebec.
“Today it’s the head office and the ownership of Rona that is threatened,” Marois told reporters Aug. 9 in Saguenay, Quebec. “We must act and we must do it with force.”
Bachand followed on Aug. 13, vowing to give company boards more powers to thwart unwanted takeover bids. Coalition Avenir Québec, a nine-month-old party headed by former Transat A.T. Inc. Vice President Francois Legault, pledged to direct the Caisse to boost investments in Quebec and keep key decision-making centers in the province.
Montreal, once Canada’s biggest city, lost 15 company headquarters between 1990 and 2010, the largest decline among the country’s five main corporate centers, according to a report published last year by the Fraser Institute, a Vancouver-based economic and policy research group. In 1998 Loblaw Companies Ltd. acquired grocer Provigo Inc., Rio Tinto Group bought Alcan Inc. in 2007 and Toronto Stock Exchange operator TMX Group Inc. took over Montreal Exchange Inc. four years ago.
Toronto lost 11 head offices in the same period, while Calgary added 31.
The Caisse, as the pension fund manager is known, is no stranger to takeover battles. In 2000, it joined forces with Montreal-based media company Quebecor Inc. to foil Toronto-based Rogers Communications Inc. in its bid to buy Quebec cable operator Groupe Videotron Ltee.
Quebecor and the Caisse ended up paying about C$5.7 billion for Videotron, now the biggest asset in the company’s Quebecor Media unit. Caisse Chief Executive Officer Michael Sabia said in February that the fund manager valued its minority stake in Quebecor Media at C$2.3 billion as of December, 28 percent less than what it paid for the asset.
A Lowe’s bid for Rona “is a political football that comes at a time when the election situation is so close,” Sebastian Van Berkom, president of the Montreal-based asset manager Van Berkom & Associates, said in a telephone interview. “Everybody is vying for an edge. Lowe’s is going hostile at a time of the election, so it’s not surprising that the politicians are trying to capture votes.”
Had an election been held last week, Marois’s Parti Quebecois, which advocates the province become independent from Canada, would have won 33 percent of the votes, according to a Léger Marketing poll published Aug. 17. Premier Jean Charest’s Liberals followed with 28 percent support, one percentage point more than Legault’s Coalition Avenir Quebec.
To placate Quebeckers, Lowe’s pledged to keep headquarters for the combined Canadian business in the Montreal suburb of Boucherville, where Rona is based. Lowe’s “understands and shares Rona’s commitment to procuring goods in Canada wherever possible,” the company said July 31.
Rona rose 3.6 percent to C$12.90 at the close in Toronto, 11 percent less than Lowe’s unsolicited offer of C$14.50, disclosed July 31. The gap between the offer and the share price is the second-widest among pending deals in North America larger than $1 billion, data compiled by Bloomberg show.
Chris Ahearn, a spokeswoman for Lowe’s and Michelle Laberge, a spokeswoman for Rona, didn’t return messages seeking comment yesterday.
Bachand and rival politicians argue Quebec merely wants to keep up with legislation already in place in about 30 U.S. states, which gives boards the means to reject takeover bids deemed detrimental to the best long-term interests of a company. Quebec convenience store operator Alimentation Couche-Tard Inc. ended its efforts to acquire Casey’s General Stores Inc. in 2010 after the Iowa-based chain sued Couche-Tard, claiming that the Canadian retailer violated U.S. securities law when it made an unsolicited tender offer.
“The playing field isn’t level,” Bachand said in an Aug. 19 telephone interview. “Under Canadian rules, a board has to submit a bid to all shareholders, whereas in many U.S. states, directors are under no such obligation. It’s time that we start thinking about changes that could be implemented to protect our companies.”
Even Montreal-based BCE Inc.’s deal for Astral Media Inc. has entered into the campaign. While competitors such as Quebecor argue the transaction will increase concentration in the broadcasting industry, politicians such as Marois say they’re concerned that BCE’s Bell Media unit is run out of Toronto. Maka Kotto, a candidate for the Parti Quebecois near Montreal, said Aug. 11 the party would take “all necessary means” to block the deal for the television production company by Canada’s largest telecommunications operator.
If re-elected, Bachand said a Liberal government will seek assurances from BCE that the company’s French-language media business will be based in Montreal.
“Our concern is that the center of decision will be fragmented after the deal closes, and that’s why we want commitments from Bell,” Bachand said.
BCE has sought to defuse the controversy by taking out full-page advertisements in Montreal newspapers such as La Presse and Le Devoir, trumpeting the C$1.2 billion it spends annually in Quebec on salaries, pensions and benefits. Forty-six BCE executives live and work in Quebec, a figure that will increase with Astral in the fold, the company said.
Quebec “will remain the epicenter of our French-programming content creation, management and delivery,” BCE said in an Aug. 18 ad published in the Montreal Gazette.
Jean-Charles Robillard, a spokesman for BCE in Montreal, said yesterday the company expects to increase Astral’s spending on French-language content development by about 5 percent annually. Hughes Mousseau, a spokesman for Astral, didn’t return a message seeking comment yesterday.
Canada’s federal government has the power to block takeovers over C$330 million under the Investment Canada Act unless they provide a “net benefit to the nation.”
Investors aren’t convinced the rise in nationalist sentiment along with proposals to protect Quebec companies from foreign takeovers and devote more public money to supporting businesses is the right move for a province needing investment and growth drivers.
Quebec has the highest debt in Canada, at about 62 percent of 2011-12 gross domestic product, according to the credit-rating company DBRS Ltd., and the second-highest level of income taxes, at about 46 percent, according to the Fraser Institute. GDP and productivity growth in the province trail the national average, while unemployment, at 7.6 percent in July, exceeds it.
Stephen Jarislowsky, the 86-year-old founder of Montreal money manager Jarislowsky Fraser Ltd., which manages about $36 billion, said he has noticed a rise in nationalist sentiment in the province.
“It’s certainly hurting Quebec,” said Jarislowsky, who moved to Montreal in 1949. “When I came here, Montreal was the most important city in Canada. It’s highly regrettable. There doesn’t seem to be an understanding of the realities of the world and what Quebec has to do in order to compete and not lose its position.”
Rona’s fate will probably hinge more on Lowe’s than the Quebec election. Lowe’s CEO Bob Niblock said on Aug. 20 a transaction was not imminent.
“We’re not going to do something that doesn’t make long-term sense for the company,” Niblock said on a conference call after the company reported a 10 percent drop in second-quarter profit. “We’re not going to overpay for something that we don’t think we can get an adequate return on.”