Lowe’s drops controversial $1.8-billion bid to buy Rona

The decision announced Monday is only a signal that the “friendly" of the takeover process is over, Keith Howlett of Desjardins Securities, said in a note.

“Our view remains that Lowe’s wants to conclude a transaction with Rona before Rona closes, or shrinks in size, 23 big-box stores located outside Quebec. Lowe’s would, in our view, like to convert many of these locations (as well as the other Rona big-box stores outside Quebec) to Lowe’s,” he wrote.

The Globe and Mail
September 17, 2012

Lowe’s drops controversial $1.8-billion bid to buy Rona
Bertrand Marotte

rona-edmonton.jpg

A Rona store in Edmonton.

Lowe's Cos. Inc. has withdrawn its $1.8-billion (U.S.) offer for Quebec-based home improvement retailer Rona Inc.

Mooresville, N.C.-based Lowe's said in a terse statement it's "unfortunate" that Rona's board of directors "did not recognize the important economic and commercial benefits of the proposal for its stakeholders and for Canada.

"Lowe's has repeatedly attempted to engage the board of directors of Rona with respect to its proposal in order to conduct confirmatory due diligence and move forward with a friendly negotiated transaction."

Lowe's interest in Rona triggered a huge controversy in Quebec when it was made public in early July, just as the province went into a summer election campaign. The Liberal government said it would move to block a formal bid on the grounds that Rona was too strategic an asset to let go, given its significance as a key asset in the Canadian economy.

Quebec Finance Minister Raymond Bachand said there was too great a danger that the Canadian supplier base would be eroded.

During the campaign, Parti Québécois Pauline Marois vowed to block the deal if her party were to win the election, which it did but only with enough seats to form a minority government.

"Lowe's continues to believe that a combination of Lowe's and Rona would create significant value for shareholders," the company said in a news release.

It said it is formally withdrawing its $14.50-per-share offer.

Lowe’s – which currently has only a small presence in Canada – privately made known its interest in the country’s largest home-improvement chain in late 2011.

Shortly after Lowe's interest became public, the Caisse de dépôt et placement du Québec increased its stake in Rona to 14.2 per cent.

Lowe's has about 1,700 stores in the U.S. but only 30 in Canada. Rona has about 800 outlets and about 30,000 employees.

The Caisse sent mixed signals about its views towards the unsolicited bid, saying it was out to get the best value for Rona but that it also wanted to ensure that the head office remained in Quebec and that the supplier network continued to be developed in Quebec and the rest of Canada, with full support for the role of its franchisees as well.

Rona president and chief executive officer Robert Dutton insisted that the proposed deal was not a good fit for the company.

Bay Street investors, however, were in favour of the transaction, arguing that Rona has been poorly managed for years and needs a major shakeup.

Still, Lowe’s carefully phrased announcement Monday appears to leave open the possibility of another takeover attempt at a future date, says RBC Dominion Securities analyst Irene Nattel.

“It should be noted that Lowe’s announcement includes the language ‘continues to believe that a combination of Lowe’s and Rona makes business sense and would create significant value for all stakeholders,’ which suggests [Lowe’s] could return at some point with another proposal to acquire Rona,” she said in a research note.

“Given a slowing Canadian housing market and outlook for sluggish consumer spending, we expect [Rona’s] results – notably top line – to remain pressured and we would therefore expect a certain level of shareholder support for a transaction, at an appropriate price.”

Lowe’s spokeswoman Julie Yenichek said in an interview that politics had nothing to do with the decision to withdraw the all-cash bid.

The lack of receptivity to the offer on the part of Rona’s board is behind the move, she said.

“It was just that, not the politics. We really did want to engage with the board in a positive manner,” she said.

One analyst believes this is far from the end of Lowe’s designs on Rona.

The decision announced Monday is only a signal that the “friendly" of the takeover process is over, Keith Howlett of Desjardins Securities, said in a note.

“Our view remains that Lowe’s wants to conclude a transaction with Rona before Rona closes, or shrinks in size, 23 big-box stores located outside Quebec. Lowe’s would, in our view, like to convert many of these locations (as well as the other Rona big-box stores outside Quebec) to Lowe’s,” he wrote.

Three of those stores were recently closed as part of Rona’s strategy of moving away from the big-box concept.

Lowe’s is preparing to either proceed with a hostile bid within 3 months or intensify its competitive actions in the Canadian marketplace to “facilitate more productive negotiations in two or three years,” he said, pointing out that the first option does not preclude the second.

Lowe’s wants to get its hands on the remaining 20 big-box stores before Rona moves further along in the process of closing or shrinking them, he said.

He added that the policy decisions of the new Quebec government regarding foreign takeovers “remain of critical importance.”

http://www.theglobeandmail.com/globe-investor/lowes-drops-controversial-18-billion-bid-to-buy-rona/article4548725/


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