Lowe’s Cos. (LOW:US) withdrew its unsolicited proposal to buy Quebec-based home-improvement retailer Rona Inc. (RON) after the offer for C$14.50 ($14.87) a share was opposed by Rona’s board and local politicians.
Rona rebuffed Lowe’s request for permission to conduct due diligence and proceed with a friendly transaction, the Mooresville, North Carolina-based retailer said today in a statement. The withdrawn proposal, which valued Rona at about C$1.76 billion, still makes sense for the companies, Lowe’s said. Rona shares had their biggest drop ever.
Lowe’s Chief Executive Officer Robert Niblock abandoned the retailer’s largest acquisition after the plan became an election issue in Quebec, where leaders feared job losses despite assurances by Lowe’s to safeguard employment. Lowe’s, which opened its first Canadian stores in 2007, may pursue a hostile takeover, said Keith Howlett, an analyst at Desjardins Securities in Montreal.
“The ‘friendly’ phase of the takeover process is now suspended,” Howlett, who advises buying Rona’s shares, wrote in a note.
Lowe’s wants to reach a deal with Rona before the Boucherville-based retailer closes -- or shrinks the size of - -23 big-box stores outside of Quebec, Howlett said. The U.S. retailer may proceed with a hostile bid within three months or step up competitive pressure to force “more productive negotiations in the next two or three years,” Howlett wrote.
Lowe’s is committed to its Canadian business and is “continuing to evaluate options to continue to grow the business,” including increasing sales internally as it’s done so far, Julie Yenichek, a company spokeswoman, said by e-mail. The company operates about 30 stores in that country and ranks second in sales behind Home Depot Inc. (HD:US) in the U.S.
Rona tumbled 12 percent to C$11.29 at the close in Toronto, the biggest decline since its 2002 initial public offering. Lowe’s slipped 0.6 percent at $29.23 in New York.
The acquisition ran into opposition from the Liberal Party and the separatist Parti Quebecois during this month’s election, as both parties pledged to shield Quebec businesses from foreign takeovers. On Sept. 4, the PQ won a minority mandate, beating the incumbent Liberals to regain power for the first time in nine years.
Rona has “considerable potential for improvement,” said Maxime Chagnon, a spokesman for the Caisse de Depot et Placement du Quebec, the retailer’s largest investor with a 15 percent stake. “By improving its performance, it will consolidate its position.”
Chagnon said the Caisse de Depot, a Montreal-based pension fund with a mandate to support Quebec businesses, is “a long- term investor in Rona.”
Another option for Lowe’s is ceasing operations in Canada, where its comparable-stores have dropped for eight straight quarters, Jim Durran, an analyst with Barclays Plc in Toronto, wrote in a note. He rates Rona as equal weight, equivalent of a hold recommendation.
“Exiting Canada could also be a legitimate answer for improving shareholder returns,” Durran said. Lowe’s may be “losing more money in Canada than it had expected to five years into its Canadian entry.”
Leaving Canada “is not on the radar screen at this point,” Niblock said in an interview Aug. 20.
“It is unfortunate that the Rona board of directors did not recognize the important economic and commercial benefits of this proposal for its stakeholders and for Canada,” Lowe’s said in today’s statement.
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