Lowe's to Acquire Canadian Home Improvement Chain Rona--4th Update
February 03 2016 - 3:18PM
Dow Jones News
By Austen Hufford
Lowe's Cos. Chief Executive Robert Niblock tried to engineer a
purchase of Canadian home-improvement chain Rona Inc. in 2012, but
he was snubbed. Instead of walking away, he waited for the right
moment to try again.
In the years following Rona's rejection, the Canadian dollar
depreciated against the U.S. dollar and Rona worked to streamline
its operations and shed some peripheral assets.
And in 2015, Mr. Niblock reached out to Rona's chairman to begin
buyout discussions anew. With a higher offer price, better premium
and guarantees of most Rona workers keeping their jobs, he finally
got his deal.
"One thing led to another," Mr. Niblock said in an interview
with The Wall Street Journal. "We are in a much different place
than where we were last time."
Lowe's said Wednesday it would buy Rona for about 3.2 billion
Canadian dollars (US$2.3 billion), paying $24 for each common share
of Rona, more than double its value as of Tuesday's close. Since
the Canadian dollar is worth about 72 U.S. cents today, the deal is
valued at about $2.3 billion in U.S. currency.
Mr. Niblock said the price was justified by Rona's performance,
noting that "they've done quite a bit to improve their
operations."
Rona's acceptance of the deal is a turnaround from the cold
shoulder Lowe's got in 2012. That offer, for C$1.76 billion (about
US$1.75 billion at the time), represented a 37% premium over Rona's
stock price, but Rona said it wasn't in the best interests of the
company or its shareholders. The prior offer also faced challenges
from the government in Quebec, where Rona is based, with its then
finance minister telling reporters that Rona was a "strategic
asset" that shouldn't fall into foreign hands.
With the deal Wednesday, Lowe's said it agreed to several
stipulations related to keeping jobs and operations in Canada.
Lowe's said it would keep the "vast majority" of current employees
and executives and would base Lowe's Canadian operations in
Boucherville, Quebec, Rona's home. It will continue to use Rona
brands and local supply chains.
Rona's largest shareholder with a 17% stake, the provincial
pension fund Caisse de Depot et Placement du Quebec said on
Wednesday that it supported the transaction.
Still, the deal will require approval from Canada's antitrust
authority, known as the Competition Bureau. To get it, Lowe's needs
to show that the deal would generate economic benefit for Canada
under the country's foreign-takeover rules.
Despite the cultural and economic similarities to the U.S.,
Canada has been a difficult market to crack for some U.S.
companies, and investors showed some skittishness in that regard,
sending Lowe's shares down 6.6% in late afternoon trading.
Sears Holdings Corp., for example, spun off most of its stake in
Sears Canada Inc. in 2014, and the Canadian unit has continued to
experience a decadelong string of annual revenue declines. Target
Corp., after spending the equivalent of more than $4 billion
setting up its Canadian operations, ended its money-losing endeavor
and shut down its more than 130 stores in the country in early
2015.
Michael Baker, a senior analyst with Deutsche Bank, said the
Canadian expansion could take resources--and executives' time and
thought--away from Lowe's main business.
"There is concern this could be a distraction." Mr. Baker said.
"It seems less risky for Lowe's to focus on its core U.S.
business."
Mr. Niblock noted that Lowe's, which already runs 42 stores in
Canada and has been in the country since 2007, was "very
disciplined with our expansion plans to ensure we understood the
nuances in the market."
Most of Lowe's Canadian stores are in Ontario, and it has none
in Quebec, where most of Rona's stores are located. Rona sells and
distributes hardware, home-renovation products and building
materials. The company has a network of 236 corporate and 260
dealer-owned stores under various brands serving professional
contractors and do-it-yourself consumers.
Lowe's said it expects combined Canadian operations to represent
about 7% of its total annual revenue. French-speaking Sylvain
Prud'homme, a Canadian retail veteran and president of Lowe's
Canada, will continue to head the Canadian operation after the
acquisition. Mr. Prud'homme's hiring in 2013 was seen at the time
as a sign that Lowe's hadn't given up on Rona.
The company expects the deal to close in the second half of the
year and will add to Lowe's earnings. Lowe's said it has identified
ways to get more than C$1 billion of increased revenue and
operating profitability in Canada, including using shared suppliers
and introducing appliances into some Rona stores.
Ben Dummett in Toronto contributed to this article
Write to Austen Hufford at austen.hufford@wsj.com
(END) Dow Jones Newswires
February 03, 2016 16:03 ET (21:03 GMT)
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