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Lowe’s entered the Canadian market in 2007 and won Rona for US$2.4-billion in 2016.Blair Gable/The Globe and Mail

Canada’s hardware landscape appears headed for a shakeup as Lowe’s Cos. Inc. LOW-N exits the market, with rival groups already positioning themselves to sign on Rona dealers who decide to cut ties with the banner.

Mooresville, N.C.-based Lowe’s said last week it struck a deal to sell its Canadian operations to New York private-equity firm Sycamore Partners for US$400-million in cash plus unspecified performance-based benefits. The agreement will mark the end of a frustrating multiyear run in Canada for Lowe’s, during which it struggled to make Rona sufficiently profitable.

Sycamore will take over about 450 stores, including 70 Lowe’s big-box stores and some 150 corporate-owned Rona stores as well as the wholesale business supplying 210 independent Rona dealers. Many of those independent dealers are expected to end their contracts with Lowe’s Canada and look for new hardware and building-materials buying groups to ally themselves with, such as Castle Building Centres Group Ltd., Groupe BMR Inc., or Home Hardware Stores Ltd.

“It’s going to be shark week,” said Michael McLarney, a hardware industry specialist who runs trade publication Hardlines. “The other groups are going to be circling trying to get these Rona dealers to convert.”

Behind the scenes, the jostling has already started. And it reflects the view by many hardware business owners that a private investment firm is not necessarily the best partner during a time of economic upheaval, as they tend not to be long-term owners. After a two-year period during which the industry in Canada benefited from a surge in home renovations during the COVID-19 pandemic, hardware retailers are now resetting sales forecasts and bracing for a recession.

Castle has heard in recent days from several Rona independent dealers with whom it has engaged in past conversations about joining the member-owned co-operative, said Ken Jenkins, Castle’s president and chief executive officer. He said anxiety among Rona dealers under Lowe’s has been on the rise amid that company’s difficulties in Canada and that this could be a tipping point for many to join rival groups.

“Independents are somewhat slow to change but I do see heading into 2023 as this deal finalizes that there will be an early exodus of a number of their dealers,” Mr. Jenkins said, adding Castle intends to take advantage of the expected decampment to expand its own footprint from the current 330 stores. “We will be heavily engaged in that opportunity in the months to come.”

Groupe BMR is also in expansion mode. The chain, which currently has some 275 renovation centres and hardware stores in Quebec, Ontario and the Atlantic provinces, is “obviously listening and open to discussions” with dealers from Rona and other competing banners, said BMR communications director Kaven Delarosbil.

Valérie Gonzalo, a spokesperson for Lowe’s Canada, said the company believes the sale will have minimal impact on its relationship with Rona dealers. Sycamore is strongly committed to the dealer network as “an integral part of our Canadian business model,” she said. The new owners also support the implementation of Lowe’s Canada’s existing growth plan, she said.

Existing Lowe’s-branded stores in Canada will eventually adopt the Rona banner, Ms. Gonzalo said. Sycamore intends to keep the head office of Lowe’s Canada in Boucherville, Que., and maintain the chain’s commitment to Canadian and Quebec-based suppliers.

This isn’t the first investment by Sycamore Partners in Canada. The firm took over U.S. office-supply chain Staples Inc. in 2017 for US$6.9-billion, including its Canadian stores. On its website, Sycamore says its strategy is to partner with management teams to improve the operating profitability and strategic value of their businesses.

Lowe’s entered the Canadian market in 2007 and made a hostile attempt to buy Rona in 2012 that was rejected by the company as well as the Quebec government. The U.S. giant initially failed to understand the political and public sensitivity in the province to a foreign takeover. The company came back with a sweetened offer in 2016 and won Rona for US$2.4-billion ($3.2-billion based on the exchange rate at the time).

Quebec Premier François Legault’s Coalition Avenir Québec government struck a note of resignation in accepting this latest change of control for Rona.

“I would have liked it to be sold to Quebeckers but the damage was done in 2016,” Economy Minister Pierre Fitzgibbon told Montreal’s La Presse newspaper last week. Sycamore has a horizon of five to seven years, he says. “Our role is to work with Quebec interests so that we’re ready when they sell.”

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