Home and garden centre Lowe's has put in a bid for ownership of its currently Canadian-owned competitor, Rona, July 31, 2012.Galit Rodan/The Globe and Mail
If Lowe's Cos. Inc. is serious about buying Rona Inc. outright, it's going to need more than $1.8-billion. That seems to be the general consensus from analysts today, addressing the $14.50 per share proposal that American-owned Lowe's offered up to home-grown Rona.
Alan Rifkin, an analyst at Barclays Capital Inc., said in a note to clients that he "would not be surprised if Lowe's increased its bid to accelerate expansion in Canada." When asked to name a target, he thought "up to $16 to $17" was plausible.
Derek Dley, a consumer products analyst at Canaccord Genuity, went a little further, saying that something in the $16 to $18 range would be reasonable. "$14.50 represents about 14 times my 2013 estimate for Rona. When you look at Canadian retail, that transaction multiple seems a little light," he explained. Lowe's would likely have to do better than that to generate interest from Rona's management and shareholders.
Despite this, Mr. Dley downgraded the stock to "hold" today based on his assessment that the company's valuation approached a fair point in the last few weeks and that Canadian home reno spending has been subdued because of the economy. People have less discretionary spending right now, and are generally waiting longer to renovate after they buy homes.
One dissenting voice was issued at RBC Capital Markets (which covers both companies). A report assessed that, on a trailing basis, the proposed "price of $14.50 is equivalent to 0.5 times revenues and 8.4 times EBITDA, toward the higher end of the mid-point of the range of precedent transactions." The valuation, it concluded, was pretty much on par with precedent-setting transactions.
But whether or not those higher premiums might be good for Rona, offering such an elevated multiple (which equates to 15.4 to 17.3 times Mr. Dley's estimated earning per share for Rona next year) might not sit well with Lowe's shareholders, who are holding a company that is trading at less than 12 times its forward earnings. Unless Lowe's can be clear about why it needs Rona, such an acquisition could be hard for investors to stomach. After all, Rona is a smorgasbord of store types with space ranging from 1,000 square feet to 165,000 square feet, and this doesn't seem compatible with Lowe's strategy.
Analysts from RBC Capital Markets also pointed out in a recent research note that taking on such a multifaceted firm like Rona – which has also been underperforming – "could prove to be a distraction for Lowe's in its efforts to improve its U.S." As such, the report went on to say, the company's investors probably wouldn't be pleased about the distraction. In fact, that's putting it mildly. Shareholders are already yelling "no!" to the deal through Lowe's stock price which dropped by $1.49 (U.S.) on Tuesday.
Either way, Lowe's likely knows Rona is not just going to sell off all its big boxes or Quebec stores. Lowe's only option, if it wants to proceed, may be to pony up the cash.
As for a supposed bidding war between Lowe's and the Quebec government, it's hard to say how that could effect pricing. But analysts say if such a competition does arise, it's pretty safe to say it will be a two-competitor match. Analysts seemed to conclude that Home Depot, which is already quite built-out in Canada, is almost certainly not interested in diving into the scrum.