Rona Inc. won the game against Lowe’s Cos. by running a trick play from the takeover defence playbook.
Two months after approaching Canada’s biggest hardware retailer about a $14.50-a-share takeover bid, Lowe’s is now slinking away. The U.S.-based company, faced with huge political hurdles in Rona’s home base of Quebec, formally withdrew its interest in Rona on Monday.
Rona made it happen by doing exactly what a company is not supposed to do when faced with an unwanted offer.
Rona received in early July what it called a “non-binding” proposal to buy the company for $14.50 a share, a tasty premium to the market price for a company whose stock had been a huge disappointment. In banker parlance, it was a bear-hug letter – an offer that’s designed to be too rich for a board to refuse, especially if shareholders get wind of it.
The game plan for most bear hugs is to say nothing in public. Of course, a credible offer that would be attractive to shareholders must be disclosed. But there is a lot of wiggle room for a board on the defensive, if a letter like the one from Lowe’s can be characterized as falling short of a firm offer. So long as the lawyers will allow a target company to remain silent, it will.
The last thing a target wants is the interest to become public. At that point, when the world knows there’s a suitor, the situation moves into a predictable end game. The target’s stock soars. Arbitragers eager to sell the company start snapping up stock. The target board is pressured into auctioning the company. And there’s a good chance it’s sold.
Unless, the target is in Quebec when the province is facing an election campaign. Rona, its bankers at BMO Nesbitt Burns and Scotia Capital Inc., and its lawyers at Norton Rose Canada LLP and Davies Ward Phillips & Vineberg LLP read the situation perfectly.
The company kept quiet, the standard play, for three weeks. However, as soon as it was clear there would be an election in Quebec, Rona itself broadcast news of the approach far and wide.
Rona’s stock soared. Big, long-suffering shareholders supported the offer. And none of it mattered, because just as Rona must have expected, the takeover offer became a political issue. Suddenly Rona was virtually takeover-proof, with politicians swearing to protect the company from American interlopers determined to usurp Canada’s rightful control of the strategic business of stepladders and bathroom tiles.
The game is playing out similarly in the cases of Telus Corp. and Agrium Inc. and their respective battles with hedge funds. In each case, interlopers appear to have misread the field. What looks like an opportunity to generate value on paper founders in the real world.
New York-based hedge fund Mason Capital is trying to stop Telus Corp. from collapsing its dual class share structure on a one-for-one basis. Mason is trying to fight for a ratio that favours owners of voting shares, which have historically traded at a premium to Telus’s non-voting shares. Mason, however, has received next to no public support from big owners of voting shares. Telus’s management garners too much respect from shareholders, as does the performance of the company’s stock.
Another New York fund, Jana Partners, is taking aim at Agrium. Jana urges a breakup, seeing Agrium as a conglomerate because it both makes fertilizer and sells it to farmers through a network of retail stores. It’s a standard move in the hedge fund playbook. Find a company with assets that might trade more richly if split up, then crusade against the unwieldy conglomerate to gin up shareholder support. However, once again, Agrium has a management team with a well of credibility built up over years of handing good returns to shareholders. Support for Jana, at least in Canada, is not all that apparent.
In each case, street smarts is trumping the playbook.