Canadas largest home-improvement retailer, Rona Inc., said Tuesday that it has rejected a $1.8 billion takeover offer from Mooresville-based Lowes Inc.
But Lowes indicated it may press on: The company said it has the support of institutional shareholders who own about 15 percent of Ronas stock.
We think this proposal is very important, said Doug Robinson, Lowes head of international development. Were not speculating on what the next steps are. We have said to the Rona board were still interested in a friendly transaction.
Lowes CEO Robert Niblock echoed Robinson in a statement: We reiterate our proposal to the Rona board. We hope that in the exercise of its fiduciary duties, Ronas board will reconsider and recognize that our proposal represents a very attractive opportunity for all Rona shareholders and the companys major stakeholders.
The deal, if it were to happen, would be Lowes biggest acquisition to date.
Lowes offered Rona $14.50 Canadian dollars (which is almost the same in U.S. dollars) per share to acquire the company. That offer, which Lowes made July 8, would represent a 37 percent premium on Ronas pre-offer stock price. Ronas stock closed at CA$13.50 a share Tuesday, up 13.7 percent.
Rona said it has decided to remain independent after reviewing the offer and to pursue its own strategic plan. But Rona also revealed that Lowes would not confirm that it wont pursue a hostile takeover of the company.
Lowes told Rona it was going to consider all of its options, the company said.
The unsolicited takeover offer from Lowes stirred a defensive reaction from Canadian politicians. This transaction does not appear to be in the interests of either Quebec or Canada, Quebecs finance minister Raymond Bachand said in a statement. He said he and other officials are assessing their options, including the possibility of establishing a fund to defend Quebecs interests.
Based in Boucherville, Quebec, Rona operates about 800 stores, including franchised locations. The company posted a CA$86 million loss in 2011, as revenue was flat, at CA$4.8 billion.
Lowes, the second-largest home-improvement retailer in the U.S., has seen its growth slow as the housing market and the economy continue to drag. The company is still significantly larger than Rona, with 1,745 stores and $50 billion in sales last year. Lowes has 35 stores in Canada, but none in Quebec.
Over the past year, Lowes has taken steps to cut costs, including laying off about 1,700 in-store managers, offering buyouts to hundreds of workers at its Mooresville headquarters and cutting by half the number of new stores it plans to open.
Despite the low-growth environment, Lowes has managed to revive its earnings, posting a $527 million profit for its most recent quarter. The company had more than $3 billion worth of cash at the end of May, according to securities filings, and said it could acquire Rona without needing any financing.
Following the news, credit rating agency S&P placed the long-term A- corporate credit rating for Lowes on watch with negative implications. The possible downgrade, S&P said, was triggered by Lowes apparent increased appetite for risk, combined with increased leverage for debt-financed share repurchases over the past two years.
Lowes has a limited track record of acquiring and integrating companies and it is not clear that the Canadian home improvement market wont decline further, S&P wrote. They also pointed out that while Lowes operates only big-box stores, Rona has a wide mix, from big-boxes to small plumbing and HVAC outlets.
Robinson, however, said that Lowes strategy with international expansion would be to adapt to the local market. Ronas headquarters would remain in Boucheville, and Lowes would keep Ronas eclectic mix of different store sizes, he said.
Lowes stock closed down 5.6 percent Tuesday, at $25.37 a share.