The ouster of Robert Dutton as chief executive officer of Rona Inc. (RON), Canada’s largest home improvement retailer, increases the chances talks with former suitor Lowe’s Cos (LOW:US) will resume.
“As a shareholder, we hope that Mr. Dutton’s departure signals that the Rona board will be reassessing all avenues to unlock shareholder value,” Richard Fortin, Calgary-based portfolio manager at Bissett Investment Management, said in a telephone interview. “The obvious one is going back to the table with Lowe’s.” Bissett oversees C$15.8 billion ($15.8 billion), including about 2.1 percent of Rona as of June 30.
Dutton, 57, who was removed by the board after 20 years, will be replaced on an interim basis by Chief Financial Officer Dominique Boies. Boucherville, Quebec-based Rona’s profit has declined for five consecutive years and its shares have dropped 62 percent from their June 2005 peak. The company went public in 2002 and Dutton increased sales to C$4.8 billion from C$450 million while CEO.
Lowe’s, based in Mooresville, North Carolina, pulled an unsolicited offer for Rona Sept. 17 after Rona rejected requests to proceed with a friendly deal and Quebec politicians opposed it.
“Since we withdrew our proposal, we have had no further conversations,” Chris Ahearn, a spokesman for Lowe’s, said by e-mail Nov. 9. “It would be inappropriate for us to comment on the change in leadership.”
Rona rose 4.6 percent to C$10.59 by 4 p.m. in Toronto today, taking the two-day climb to 13 percent since Dutton’s departure was announced. Lowe’s earlier this year offered C$14.50 per share for Rona, which valued the company at C$1.76 billion.
Dutton’s departure “is a decision that was taken by the board, for the good of the company, and Mr. Dutton was a member of the board,” Valerie Lamarre, a Rona spokeswoman, said Nov. 9 in a telephone interview.
Montreal’s La Presse newspaper, citing an unidentified person familiar with the matter, reported Nov. 10 that Rona’s board received a new bid from Lowe’s last week for about C$15 a share. Dutton “firmly” opposed the bid, which led him to resign, the newspaper said.
Today Rona said in a statement that it “has not received any proposal of any kind from Lowe’s, and there have been no discussions between the two companies on this subject.”
Rona on Nov. 7 reported third-quarter profit that trailed analyst estimates, blaming stiffer competition and a decline in the home renovation industry.
Caisse de Depot et Placement du Quebec -- Rona’s largest shareholder with about 18.2 million shares, or about 15 percent -- said the company must now focus on increasing profit.
“Rona would not be the key player it has become without Mr. Dutton’s contribution, and we fully respect the decision,” Maxime Chagnon, a spokesman for the Caisse, Canada’s second- biggest pension fund manager, said in a telephone interview. “Following that decision, Rona must look to the future and focus all its energies on improving performance.”
Profit at Rona has declined from C$1.64 a share in 2006 to 66 cents last year. Third-quarter profit of 27 cents a share fell short of the 40-cent average estimate of seven analysts surveyed by Bloomberg. Same-store sales dropped 1 percent as revenue fell 0.8 percent to C$1.3 billion from a year ago.
“Recent quarterly results make it quite clear that the board’s current operating plan is not on pace to generate the results that shareholders demand,” Fortin at Bissett said. “Competitively, the market remains difficult.”
Rona said earlier this year it would convert 23 big box stores into smaller “proximity” stores in a bid to save about C$40 million annually by 2014 and increase return on capital.
Initially confined to Quebec after its foundation in 1939, Rona expanded in provinces such as Alberta and British Columbia through acquisitions and new stores.
During Dutton’s 20 years at the helm, Rona grew from fewer than 500 stores to over 800 corporate, franchised and affiliated outlets.
Shareholders of Lowe’s may not favor the company returning with another bid for Rona.
“People were a little bit concerned when they made the announcement,” Walter Todd, chief investment officer at Greenwood Capital in Greenwood, South Carolina, which owns about 30,000 shares of Lowe’s. “I think people felt like it was a distraction they didn’t need.”
Still, Todd said it would be easier with the CEO leaving. “Perhaps they could get a better deal on the acquisition,” he said.
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.
Even so, analysts such as Jim Durran at Barclays Capital said Lowe’s might be able to structure a deal that would protect Quebec’s interests while rewarding shareholders.
“Depending on the constraints the Quebec government demands, Lowe’s could still negotiate a palatable outcome balancing purchase price against the earnings impact of constraints the government feels are necessary to protect the Quebec economy,” Durran said Nov. 9 in note to clients.
Lowe’s, which entered Canada in 2007, had 31 stores in the country as of September. It trails Rona and Home Depot Inc. (HD:US) which each controlled 19 percent of Canada’s hardware retailing market, according to a September report by Standard & Poor’s.
Dutton’s departure “probably opens the door for either a Lowe’s solution -- I’m not saying it’s going to happen -- or a Quebec Inc. solution,” said Irwin Michael, a portfolio manager at Toronto-based ABC Funds, Rona’s third-largest shareholder. “Everything is up in the air.”
Even with the recent decline in the shares, ABC Funds isn’t thinking about selling its Rona stake because the stock is cheap, Michael said in an interview. ABC owned about 3.7 million shares as of June.
“Something has to be done,” said Michael. “It wasn’t working for the last three or four years, and in consequence the stock had fallen off. The longer the company sits and lets its franchise depreciate, the less it’s going to be worth.”
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