Shareholders hoping for a blockbuster new bid for Rona Inc. may be disappointed with what they receive.
The termination of CEO Robert Dutton and a subsequent call by major shareholder Invesco Canada to replace the company's board have increased hope that Rona will soon be back on the sales block. U.S. home-improvement retailer Lowes Cos. Inc., rebuffed last summer, is a logical buyer.
Will Lowes pay $14.50 per share – its previous offer – or even more to get the deal done? The numbers suggest not.
First, look at share-price premium.
While some analysts suggested last summer a proper takeout price for Rona would have been on the order of $18 or $19 per share, the shares never traded above the $14.50 offer, as they should if the market believed Lowes or another suitor would need to raise the bid to get a deal done. (The opposition of the Quebec government had a great deal to do with that, of course.)
In July, the $14.50 offer was a premium of about 20 per cent over the price of Rona's shares before markets learned of the proposal.
After Rona's deeply disappointing earnings last Thursday, but before news of Mr. Dutton's resignation, shares sank to $9.25. That's the best number we have for what the markets think the current Rona business is worth. A bid of $14.50 would be more than 50 per cent over that $9.25 low.
What about on a multiples basis?
In July, the Lowe's offer represented an enterprise value, or market capitalization plus net debt, of about 8.4 times trailing EBITDA, said RBC Dominion Securities Inc. analyst Irene Nattel. In a set of "precedent transactions" in the home-improvement industry, she found that multiple to be one of the highest; the average multiple, excluding the highest and lowest numbers, was 6.4 times EBITDA.
Since that time, we have two new quarters of Rona financials, and trailing EBITDA has dropped by nearly $25-million. Rona has improved its balance sheet, adding cash and shedding debt, but it isn't quite enough: By my calculations, Lowes now could offer about $14.25 per share and make the offer similar to its previous bid on an EV/EBITDA basis.
Last summer, however, Rona was still posting year-over-year EBITDA gains, albeit small ones. The third-quarter results released last week represented a drop of nearly 25 per cent in EBITDA, per Standard & Poor's CapitalIQ. If that's more indicative of the health of the business, the multiple would understandably be lower.
How about seven times EBITDA? That would value Rona at a little under $11 per share. Or less than it trades for today, much to the surprise of investors buying in with hopes of a lucrative Lowes payday.
David Milstead