The Lowe down on Rona

As Quebec prepares to block a takeover of Rona, shareholders wonder whose side the company is on

The Lowe down on Rona

Photograph by Cole Garside

RONA CEO Robert Dutton could be forgiven for being testy with investors at the hardware retailer’s annual general meeting in May. There had been incessant gossiping over whether the company was ripe for a takeover by American rival Lowe’s, and Dutton said it was “demoralizing.” The chain had been busy scooping up smaller retailers and buying back its shares as it fought to cement its place atop Canada’s competitive home-hardware industry. But rumours that Lowe’s, America’s second-largest hardware chain, was angling to gobble up the Boucherville, Que.-based Rona in order to expand its Canadian business have dogged Dutton since before Lowe’s ever set foot in the country. “Look into my eyes,” Dutton once told an industry conference in 2007 as Lowe’s was getting ready to open its first Canadian store. “We are not for sale.”

As it turned out, the speculation was more than just idle gossip. Rona announced at the end of July that its directors had been quietly talking to Lowe’s for nearly a year. The talks had culminated in a $1.8-billion purchase offer in early July, which was swiftly rejected by Rona’s board.

As far as Lowe’s was concerned, its three-page proposal was simple: $14.50 a share, more than 20 per cent above Rona’s stock price at the time, along with a pledge to keep the company’s head office and extensive Quebec supply chain intact.

But as the Mooresville, N.C., retailer soon learned, little about being a foreign company trying to do business in Quebec is simple, particularly at election time. Within hours of Rona’s announcement and a day before Quebec Premier Jean Charest would call an election, Finance Minister Raymond Bachand declared Rona “an important strategic interest” to the country and vowed to stop at nothing to keep the company in Canadian hands, including potentially creating a fund “to protect Quebec’s interests” and organizing a coalition of investors for a competing offer. “Our message to Lowe’s is clear,” Bachand told reporters. “It is not welcome.” As if to back up that assertion, Rona’s largest shareholder, the public pension fund Caisse de dépôt et placement du Québec, immediately bought another 2.4 million Rona shares, boosting its stake to more than 14 per cent. In doing so the fund said it needs to balance its mandate of generating investment returns with its mission of supporting Quebec’s economic interests.

The idea that Rona’s network of shops selling tiles and potting soil could be as critical to Canadian sovereignty as Saskatchewan’s Potash Corp., the last company protected from a foreign takeover on the grounds it was a strategic asset, seems dubious. Unlike the world’s largest potash supplier, Rona has plenty of existing foreign and homegrown competition, from Home Hardware to Canadian Tire. “To say this is a strategic asset—I don’t think anybody really buys that. Rona sells hammers and nails,” says Ian Hardacre, portfolio manager at Invesco Canada, one of Rona’s largest shareholders. “Really, the issue doesn’t even seem to be price, it just happens to be that [Lowe’s] is not a Canadian company, or not a Quebec company.” (Rona declined to comment, citing a quiet period prior to releasing its latest financial results on Aug. 8.)

But many in Quebec say being a strategic asset in the province is more about culture than business. It’s an argument that just might be enough to thwart Lowe’s plans. “[Rona] really does infiltrate the whole fabric of Quebec,” says Michael McLarney, managing director of the North American Retail Hardware Association. “There’s not a small town in Quebec that doesn’t have a Rona store that isn’t run by a family and probably a founding family of a town or an important member of the Chamber of Commerce.”

Despite its national presence—Rona has more than 950 stores and franchises across the country—it is still very much a Quebec company. It started in the 1930s when a group of Montreal-area independent hardware stores banded together to create a wholesale buying group. Its name is an anagram of the first two letters of its founders’ first names: Rolland Dansereau and Napoléon Piotte. Nearly half of its employees, suppliers and sales are in Quebec.

Nobody epitomizes the culture better than CEO Dutton himself. The 57-year-old was raised in his father’s Montreal-area hardware store and spent his entire professional career with Rona, working his way up to president and CEO in 1992. Likewise, Rona’s board of directors is culled almost exclusively from the Quebec business establishment, including former Alimentation Couche-Tard chairman Richard Fortin and Montreal Canadiens owner Geoff Molson. “There is a very tight-knit community that exists in Quebec at the senior management level, and when a member of that community is the target of an acquisition it’s going to raise eyebrows,” says William Polushin, a professor of international business at McGill University’s Desautels Faculty of Management. “It does raise the red flag because part of the Quebec identity is to have strong, homegrown enterprises and entrepreneurs and that goes beyond the shareholder discussion of return on investment.”

But some of the company’s major investors say Quebec nationalism ought to take a back seat to the needs of shareholders, who are losing faith in management’s ability to fix the company. At one point last November Rona’s stock price had plunged to just $9 (from $27 six years earlier) as its sales stagnated. “The jury is still out on their comeback,” says Irwin Michael, portfolio manager at ABC Funds, Rona’s third-largest shareholder. “As a shareholder, the question is: do you take a bird in the hand or do you hope for two birds in the bush?”

While investors say they would be happy with a bidding war between Lowe’s and a government-orchestrated coalition, Lowe’s has already found support for its offer among investors controlling 15 per cent of Rona’s shares. Others may join them in hopes of a quick resolution. “Rona has other shareholders who are willing to accept a $14.50 price for the company,” says Invesco’s Hardacre. “We’re all willing to take that price and move on.”

Fears that the U.S. retailer would close stores, lay off workers, and gut Rona’s Canadian supply contracts are overblown, says Doug Robinson, Lowe’s head of international development. The company, he says, is interested in moving away from the big-box format that has dominated its North American stores. Instead it wants to experiment with Rona’s smaller stores and independent franchisers. “When people stop and consider how we go to market, they’re going to recognize we’re not going to go in and make sweeping changes to vendors or sources,” he says. “We need people on the ground who understand the local customers’ needs.”

Lowe’s has few other options to expand its business in Canada. With just 31 stores—none in Quebec—the company has languished in fourth place behind Rona, Home Depot and Canadian Tire. The retail landscape is only getting more crowded, thanks to Target’s expansion into Canada and Wal-Mart’s counteroffensive. That’s left Lowe’s with little choice but to expand by acquiring a Canadian retailer.

“Lowe’s biggest problem is simply bulking up and building economies of scale,” says Ed Strapagiel, executive vice-president at retail consultant KubasPrimedia. “There’s not all that many choices in terms of buying other chains.”

While Lowe’s has said it’s hoping to continue negotiations with Rona’s board, analysts are predicting the company will eventually launch a hostile takeover, countered by a bid led by the Caisse de dépôt and backed by the government. That would mirror events a decade ago when the Caisse successfully blocked a bid by Rogers Communications for Videotron. As Videotron’s largest shareholder, the pension fund eventually helped negotiate a sale to Quebecor Inc.

But in trying to block Lowe’s bid, the Quebec Liberals run the risk that they could deter firms from making new investments in the province, even as the government encourages companies like Alimentation Couche-Tard and Bombardier to expand internationally. All of that throws another wrench in what was already shaping up to be an arduous election for Charest.

Says McLarney: “Who would have thought that a bunch of suits from North Carolina might affect the outcome of the Quebec election?”

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