U.S. giant hungry for Rona

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NATHAN DENETTE / THE CANADIAN PRESS Rona has a network of 800 stores in Canada as well as 14 hardware and construction distribution centres. (CP)

MONTREAL -- Quebec is vowing to block 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 homegrown 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 dépot et placement du Québec 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.

"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 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 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 closing market price suggests investors were uncertain there will be a deal, given the negative response from Rona's board and the Quebec government.

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.

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 Québec 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.

The powerful Caisse has acted before to protect interests it sees as vital to Quebec's economy. In 2000, it 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.

The Fonds de solidarité FTQ 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 Canada is currently about two per cent of Lowe's business, while the country represents about eight per cent of Home Depot's business.

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.

Lowe's has a small presence in Canada with only about 31 stores. 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.

-- The Canadian Press

Republished from the Winnipeg Free Press print edition August 1, 2012 B5