Tuesday, 31 July 2012

Lowe’s takes heat in bid for RONA

Lowe’s takes heat in bid for RONA
By Josh Rubin Staff Reporter Published on Tuesday July 31, 2012
U.S. home improvement giant Lowe’s is hoping to build itself a bigger piece of the Canadian market with an unsolicited $1.76 billion takeover bid for Quebec-based RONA Inc.
The bid, announced (and rejected) by RONA Tuesday morning, got a big thumbs-down from credit ratings agencies and stock markets, drew heated criticism from Quebec’s finance minister, and a boost in holdings by RONA’s biggest shareholders. But experts say it’s far from dead, despite the opposition.

“The board believes that, in the best interests of RONA and its stakeholders, the corporation should remain focused on executing its business plan with a view to capturing significant opportunities that it sees for its business,” RONA said in a written statement.
In response, Lowe’s said it would “consider all options.”
The Caisse de dépôt et placement du Québec snapped up almost 2.5 million Rona shares Tuesday. The Caisse now owns just over 14 per cent of RONA.
“This investment was made in the context of the announcement made today by RONA, according to which it has recently received an unsolicited acquisition proposal from Lowe’s Companies, Inc.” the Caisse said in a statement.
In trading on the NYSE, Lowe’s shares plunged $1.49 (U.S.) to close at $25.37. RONA shares, meanwhile rose $1.62 to close at $13.50; that’s still well below Lowe’s offer of $14.50 per share.
U.S. ratings agency Standard & Poors announced that it was placing Lowe’s on watch because of the takeover bid.
“Standard & Poor’s believes Lowe’s takeover offer — which could turn hostile — demonstrates its more aggressive risk appetite. We are placing all of Lowe’s long-term ratings, including the ‘A-’ corporate credit rating, on CreditWatch with negative implications,” the credit rating agency said in a statement. In contrast, S & P put RONA debt on CreditWatch with “positive implications.”
“This transaction does not appear to be in the interests of either Quebec or Canada,” said Finance Minister Raymond Bachand. “Rona is a major player in Quebec’s economy, particularly in the manufacturing industry because of its extensive network of suppliers and strong links with many regional players across Canada.”
Bachand said the province’s development corporation, Investissement Québec, can take actions to counter the bid. Bachand said the provincial agency can buy shares of Rona and lead a coalition of other shareholders opposed to the transaction.
Almost half of Rona’s purchases are made in Quebec, and almost 85 per cent in Canada, Bachand said.
While Lowe’s is a giant in the U.S. market, it has struggled to grow in Canada since it first came to this country in 2007. It currently has just 31 Canadian stores, well behind RONA’s 800 or so locations, and trailing American archrival Home Depot’s 180 stores in Canada.
Bernstein & Co. analyst Colin McGranahan said the initial bid was too rich, but he didn’t rule out another, even higher offer from Lowe’s.
“The markets and the Quebec government and credit rating agencies are basically saying ‘stop what you’re doing.’ Whether or not they’ll listen is another question,” said McGranahan, who rates Lowe’s “market perform.”
“That’s just the first shot across the bow,” agreed retail industry consultant Len Kubas, of KubasPrimedia. “I’m not surprised Lowe’s made the bid, and I’m not surprised RONA said no.”
The Canadian home improvement sector has been struggling recently, said Kubas, leaving RONA vulnerable.
“It’s been a tough market for the last year and a half. . . . People just aren’t spending as much on their house,” said Kubas.

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