Rona Inc. is laying the groundwork for a $300-million initial public offering this fall, a deal that promises to kick off debate over the home improvement chain's value and growth strategy.
Rona needs money to pay down $232-million in debt, amassed in part from last year's acquisition of rival Revy Home Centres Inc. The Boucherville, Que.-based chain plans a special meeting on Thursday at which shareholders will vote on a proposal to simplify the share structure and pave the way for the IPO.
Sources in the investment banking community said Rona, which runs 540 stores, will likely file a preliminary prospectus for up to $300-million in the next few weeks, with Scotia Capital Inc. and BMO Nesbitt Burns Inc. tapped as its lead investment bankers.
Defensive retail stock plays such as Rona are in vogue with investors -- Shoppers Drug Mart Corp. stock has doubled since it went public last year. And the home improvement chain has a growth story to tell, with double-digit percentage increases in sales in five of the past six years.
Through the first six months of this year, Rona earned $22.1-million on sales of $1.2-billion, compared with an $11.4-million profit on revenue of $731.8-million in the first two quarters of 2001. A recent report on the retail sector by analyst Denyse Chicoyne of BMO Nesbitt Burns said: "With the expanding economy, we expect the earnings momentum of Canadian retailers to remain strong."
While Rona's results are solid, analysts say the price tag on an IPO promises to spark a fight between the company and potential investor.
"Rona and its investment bankers will argue that they're Home Depot-lite, and deserve a premium valuation among Canadian retailers," said one analyst who follows the sector and asked not to be named. "The more skeptical investors are going to argue that Rona deserves the same sort of multiple that Canadian Tire commands."
Home Depot Inc., the dominant U.S. do-it-yourself chain, commands a stock price that's 22 times its projected 2002 earnings per share.
This is the common standard for valuing a retail chain.
Canadian Tire Corp. Ltd., a domestic market leader in hardware and auto repair, has a stock that changes hands at just 12 times its projected earnings.
Rona, a dominant player in Quebec, will also face questions on competitive forces in its home province.
At issue is the fate of the Réno-Dépôt Inc. chain of 18 big-box home renovation centres in Quebec and Ontario. Right now, the stores are owned by France's Castorama SA.
Castorama was taken over early this summer by British rival Kingfisher PLC.
The new management team has made it clear they intend to sell some Castorama divisions in order to help pay for this $5-billion (U.S.) purchase.
While Kingfisher has not said anything publicly about its plans for Réno-Dépôt, a number of sources familiar with the Quebec chain say it will likely be sold by its new European parent.
"I question doing an IPO [at Rona]when there is uncertainty about the sector," said one Bay Street executive. He said that if Rona takes on more debt to buy Réno-Dépôt, or if arch-rival Home Depot snaps up the chain, then investors would change the way they value Rona.
The majority of Rona's shares are currently owned by its executives, including managers of its stores. In addition, French retailer ITM Enterprises SA holds an 18.5-per-cent stake, while the Caisse de dépôt et placement du Québec and Société général de financement du Quebec, an arm of the provincial government, each own 9.8 per cent of the company.
All of these shareholders are expected to vote in favour of changes to Rona's share structure at this week's meeting in Montreal.