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Arbs bet against Lowe’s by shorting Rona

Home and garden centre Lowe's has put in a bid for ownership of its currently Canadian-owned competitor, Rona,

Galit Rodan/The Globe and Mail

Among some of those investors who make their money analyzing whether mergers close, there's not a lot of hope that Lowe's Cos. will succeed in buying Canadian hardware retailer Rona Inc.

Lowe's interest in buying Rona for $14.50 a share became public on July 31. Clearly, somebody is betting that the deal happens, because Rona stock is now trading at $14. That's higher than the stock has been in a year.

But a highly unscientific survey of arbitrageurs who play Canadian deals suggests that many are not buying Rona on expectation of an eventual Lowe's takeout. In fact, many are doing the opposite: shorting Rona stock on the belief that no deal will be forthcoming anytime soon and the stock will slide. (Short-selling involves borrowing Rona stock, selling it, and hoping to buy it back later at a lower price. The borrower can then return the stock to the lender and keep the difference in the sale and purchase prices.)

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The deal faces too many hurdles, argue those who are short Rona. Quebec's government is opposed. So is Rona's biggest shareholder, the Quebec provincial pension plan. So are Rona store operators. Even if a deal does happen, it won't be soon and the stock will suffer in the meantime. With Quebec's election in the offing, there's not much reason to see anyone backing down.

Keep an eye on next week's update on Rona short interest to see just how much pessimism about the deal there is. Lowe's interest in Rona was revealed on July 31 – and the short interest on that day was just shy of half a million shares, already up significantly from the 387,091 shares that were shorted as of the mid-July report.

Short interest in Canadian stocks is reported mid-month and at the end of the month, so an uptick in short interest in the forthcoming report will signal that pessimism is building.

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