Caisse de dépôt backs Lowe’s $3.2-billion takeover of Rona

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The Caisse de dépôt et placement du Québec is backing Lowe's Cos. Inc.'s $3.2-billion takeover deal for Rona Inc. because the pension fund manager concluded the Quebec hardware retailer was not going to be the industry champion it once hoped.

"We would very much have liked to have Rona emerge [from its turnaround effort as] a consolidator," Caisse chief executive officer Michael Sabia explained after announcing the pension fund's 9.1-per-cent return for 2015. "That was just not going to be in the cards."

The Caisse said on Feb. 3 that it would tender its 17-per-cent Rona stake to U.S.-based Lowe's, citing the friendly nature of the deal, the significant premium being offered, and the commitments Lowe's is making to maintain Rona's headquarters in Quebec and local buying policy. But Mr. Sabia's comments are the first time the Caisse has articulated in detail its thinking about the takeover. He also clarified how the pension fund sees its role as a catalyst for economic development in the context of protectionist talk swirling in media and political circles.

When Lowe's made its first offer for underperforming Rona in 2012, the Caisse's view was that Rona had the potential to be fixed and shouldn't be sold for an opportunistic price. So the pension fund brokered an agreement with Invesco Ltd., Lowe's other main shareholder, to replace Rona management and revamp the board. Now, the Caisse has concluded that although Rona is largely fixed – same-store sales have increased six successive quarters while adjusted profit rose 33 per cent in its latest quarter – industry trends are working against the company and selling is the best option.

A push by Home Depot and Lowe's, both U.S. industry giants, to expand in Canada is one element that weighed into the Caisse's thinking, Mr. Sabia said. Industry consolidation and Rona's weakness in e-commerce retail are two others, he said. "Like it or not, Rona was not well positioned."

Opposition lawmakers in Quebec's legislature maintain the Caisse should block the deal, which faces a vote by Rona shareholders before the end of the first quarter of 2016. They've also suggested that the Couillard government change the pension fund's dual mandate – which is to generate returns for depositors and stoke provincial economic development – to prioritize its economic duty and defend Quebec companies against takeovers.

Mr. Sabia rejected that view. He framed the pension fund's role as a supporter of Quebec companies looking to expand and become industry leaders in their field, noting that Montreal-based business consultant CGI Group Inc. and design firm WSP Global Inc. have both parlayed Caisse investments into a much larger international presence. The Caisse's recent investment in Bombardier's train business also aligns with this thinking, Mr. Sabia said, while Rona faced competitive roadblocks in its own growth effort.

"Over all, our view is build" the Quebec companies we invest in, Mr. Sabia said. "Build, expand and play offence."

The Caisse posted a return of 9.1 per cent for 2015, riding a diversification strategy on international stock markets to generate strong returns for its investment in Canadian dollars. Caisse equity portfolios benefited particularly from the loonie's depreciation against the U.S. dollar, the pension fund said. Its real estate holdings had a strong showing, returning 13.1 per cent.

The overall performance was below the Caisse's 12-per-cent return for 2014 but beat the 5.4-per-cent average for Canadian pension funds in a January estimate by RBC Investor Services. Net investment income came in at $20.1-billion, shy of the $23.8-billion the year before.

Net assets climbed to $248-billion as of Dec. 31, making the Caisse the country's second-largest pension fund manager behind the Canada Pension Plan Investment Board. Caisse investments outside Canada now make up about 54 per cent of its total assets, up from 41 per cent five years ago. The plan is to continue ramping up those investments abroad while reviewing strategies to mitigate currency swings, said the Caisse's chief investment officer, Roland Lescure.

"In 2015, our strategy was put to the test," Mr. Sabia said. "Uncertainty in the face of monetary policy, disorderly currency movements and collapsing oil prices all fuelled market volatility," he said, adding that developed countries posted anemic growth and emerging markets slowed.

Average annual returns over the past four years under Mr. Sabia's watch reached 10.9 per cent. His five-year term as president and CEO was extended in 2013.