Lowe's withdraws plans for Rona takeover

Rona's shares drop over 10 per cent

The Lowe down on Rona

Photograph by Cole Garside

MONTREAL – Rona Inc. has some breathing room to build its Canadian home-improvement chain now that U.S. rival Lowe’s has abandoned its controversial plan to acquire the Quebec-based chain for about $1.8 billion.

But Rona’s continued independence will come at a cost to its investors, with its shares dropping more than 10 per cent following the announcement that Lowe’s is no longer contemplating an offer of $14.50 per share cash.

Rona stock dropped $1.37 to $11.40 in early trading Monday on the Toronto Stock Exchange, following the pre-open announcement from Lowe’s Companies Inc. Lowe’s shares (NYSE:LOW) slipped three cents to US$29.37 in New York.

The U.S. chain’s withdrawal Monday comes seven weeks after Rona, the Quebec government and others objected to the U.S. company’s overtures, which had begun privately in late 2011 and became public in late July.

“Lowe’s continues to believe that a combination of Lowe’s and Rona makes business sense and would create significant value for all stakeholders,” Lowe’s said in a statement early Monday.

“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,” the statement said.

“Lowe’s remains committed to the Canadian market and will continue delivering outstanding home improvement products and services to its Canadian customers.”

Irene Nattel of RBC Capital Markets said the move by Lowe’s gives Rona some breathing room but said the U.S. retailer could return with a bid in the future.

“Given a slowing Canadian housing market and outlook for sluggish consumer spending, we expect Rona’ss 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,” she wrote in a report.

Lowe’s (NYSE:LOW) has a relatively small presence in Canada, although it is the second-largest home improvement retailer in the United States, after Home Depot (NYSE:HD).

Only 31 of Lowe’s stores are in Canada, out of 1,745 across North America.

Rona (TSX:RON) has by far the largest number of company and affiliate-owned home-improvement locations in Canada under its banner, with Home Depot a distant second.

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. Home Depot currently has 180 stores across Canada.

North Carolina-based Lowe’s had informally offered C$14.50 per share in cash but there was little enthusiasm for the proposal, even among analysts that cover the company.

They have said Lowe’s would be better to improve its performance in the U.S. market, which is showing signs of revival as home-building and home sales finally begin to recover from about five years of depressed activity.

Robin Diedrich of Edward Jones said Lowe’s will now be able to focus on improving its core U.S. business without the distraction of a potentially difficult hostile takeover transaction.

“I think it’s a smart move. They said they were going to pursue it so I’m a little surprised they withdrew so quickly but I think it’s probably for the best just given the fact that it looked like it was going to be a real uphill battle,” she said in an interview from Chicago.

Diedrich said Lowe’s will now revert to its original plan to expand in Canada organically by slowly opening stores. The challenge is there aren’t many good locations available, she said.

The U.S. company also faced a political battle in Rona’s home market of Quebec, which has undergone an election that resulted in the separatist Parti Quebecois party coming to power as a minority government.

The Quebec Liberals, a federalist party that was defeated in the Sept. 4 election, had already said clearly that they opposed a foreign takeover of Rona and a PQ government would likely be even less in favour of Lowe’s buying Rona.