Lowe's Cos. $1.8-billion offer for rival Rona Inc. has set the stage for a protracted takeover fight between two retailers that are struggling to find their way in a crowded Canadian market.
Rona, based in Boucherville, Que., said Tuesday it had received an unsolicited offer from Lowe's for $14.50 a share in early July, but its board of directors rejected it. The disclosure set off a political tug of war in Quebec. The province's powerful Caisse de dépôt et placement du Québec – Rona's largest shareholder – increased its ownership in the retailer to 14.2 per cent and laid out a number of criteria for its evaluation of any deal, including "the importance of the economic benefits of Rona's head office in Quebec."
If a deal comes together, it would shake up a sector of retail that is splintered among Rona, Home Depot, Canadian Tire, Lowe's and independent retailers. North Carolina-based Lowe's, which entered the Canadian market five years ago, has managed to build only 31 stores here and has an estimated 2 per cent of the market. But Rona, too, has suffered amid a tough environment for consumer spending, and its stock has fallen from about $25 in 2007 to less than $12 before Tuesday's news, which sent it up to $13.50.
"We think this is a combination that just makes a lot of sense to everyone," said Doug Robinson, Lowe's head of international operations.
Lowe's "expression of interest" – it isn't a formal offer – comes as the estimated $40-billion home-improvement market feels the pressures of a shaky economy which has left Rona in a weaker financial position than it was before the recession and Lowe's struggling to find attractive store locations. Any combination of the two would also cause ripple effects among domestic suppliers, if Lowe's were to shift more of its business to U.S. vendors.
"It's extremely tough for Lowe's," said Paul Davies, a Toronto contractor and former executive at Lowe's Canada. "The growth is pretty stalled for them – they can't get critical mass."
But while the Quebec government suggested it might intervene to protect Rona from its U.S. suitor, some of Rona's shareholders welcomed the bid. "We are delighted to see a takeover," said Irwin Michael, whose firm has owned more than 3.6 million Rona shares in several funds for the past couple of years.
Shareholders such as Norman Levine may seek a higher bid. Mr. Levine, managing director at Portfolio Management Corp., expects Lowe's would have to pay more to win wide shareholder support. Lowe's said it has 15 per cent of shareholders onside. "We think they may have to probably pay in the $16- to $17-a-share range to get enough shareholders to make it successful," said Mr. Levine, who along with his clients owns Rona shares. "At that price, I think that is full value under current conditions …
"Shareholders have been suffering for the last five years. Lowe's is finally giving them a reason to be happy. Management has shown themselves not capable of running a company the size it is. They were great at building it up … Now they are wrapping themselves in the [Quebec] flag, which is the last refuge of bad management."
Still, Rona could also look for a white knight, Mr. Levine suggested. Potential candidates include Canadian Tire Corp., British-based home improvement retailer Kingfisher PLC and Canada's Irving family, which owns the Kent Building Supplies chain in the Maritimes.
While officials at Canadian Tire and Kingfisher wouldn't comment, sources at both said that buying Rona is not a high priority for either of them. Canadian Tire has its hands full digesting another acquisition – the retailer that runs Sport Chek and other top sporting goods chains – while Kingfisher is focusing its international expansion on developing economies, sources said.
Amid the jockeying, Lowe's, which only runs big-box stores, would find it challenging to fold into its operations Rona's smaller stores, many of them franchised, with different ways of running their business and more control given to local operators, said Michael McLarney, president of industry publication Hardlines.
Lowe's would face cultural differences at Rona, which runs its stores with a priority on using Canadian suppliers, Mr. McLarney said. "They may move more sourcing back into the U.S."
Nevertheless, Mr. Robinson said Lowe's is committed to keep running Rona with its current head office in Boucherville, keeping jobs in Canada. And he said that Lowe's is looking to diversify its store network in Canada, adding smaller outlets to its base. Already Lowe's retailing in Australia and Mexico has a variety of store sizes, including franchisees, he said.
"We really like the Rona formats – the multiple different formats," he said. "We think it makes enormous sense here in Canada … Internationally we're adapting to fit the local market opportunities."
Do consumers care about using their hard-earned dollars to support Canadian companies? Report on Business reporter Josh O'Kane finds out what Rona shoppers had to say.
Near the corner of St. Clair Ave. and Keele St. in Toronto's west end, a Rona sits across the street from a mammoth Home Depot. On Tuesday's lunch hour, both parking lots were half empty, with only a few dozen consumers inside.
While some shoppers hunted for deals, others visited Rona with purpose: while both stores flew a Canadian flag to greet customers, they chose to shop at the truly Canadian store.
"I support the local economy," said Ramani Ramakrishnan, a professor of architectural science at Ryerson, who was sitting on a patio chair.
Shopping at Canadian-owned stores like Rona is important to him so that profits stay in Canada, "and not Big Brother down south."
He believes keeping Rona Canadian-owned will mean fairer wages and benefits for the store's employees. "I don't mind paying a little extra money of it's a Canadian company."
Outside in the store's garden centre, William Borg shared the sentiment.
"The main thing is that it's Canadian," he said. "At least the jobs are in Canada."
But not all shoppers are so patriotic. It helps that Rona is Canadian, said Joseph Gauci, shopping with his wife Eva Gauci, but "we like to see deals" - and they don't discriminate against price.