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Rona Rejects $1.8 Billion Offer from Lowe’s

2 August 2012

It was Reuters who first announced that Lowe’s, an American home improvement company, wants to expand its current reach into Canada and has put out in an offer to Rona to do so. Rona, a Canadian based competitor with stores reaching throughout the entire country, hasn’t agreed to the deal. They’ve cited concern for their shareholders and their country, for the rejection; which could mean that now they’re in for a hostile takeover.

The offer from Lowe’s would have given Rona shareholders $14.50 a share, which Quebec-based Rona doesn’t think was enough for them; an opinion that the federal government agreed with. “This transaction does not appear to be in the interest of either Quebec or Canada,” said Quebec Finance Minister Raymond Bachand.

But the Quebec Finance Minister’s concerns go deeper than just what the impact to the shareholders would be. “Rona is a major player in Quebec’s economy, particularly in the manufacturing industry because of its extensive network of suppliers and strong links with many regional players across Canada.”

And that fact might be what should worry all Canadians the most. Should that extensive network of Rona suppliers be cut short after a potential Lowe’s takeover, what would happen to those jobs, that profit, and ultimately, that income that Canadians are bringing home right now? Would it all be converted to an American supply, with Lowe’s headquarters and strong ties to the country south of our border?

Should that happen, it could have a potentially devastating effect on the Canadian economy. It would cost 33,000 jobs lost in the province of Quebec alone, not to mention all the other Rona employees and suppliers across the country that could also be out of work.

Not to mention the fact that this is a time when manufacturing plants are already closing all around Ontario and the rest of the country; thousands of Zellers employees are looking at losing their jobs; and other major retailers, such as Forzani Group Ltd., former owners of Sport Mart, Athlete’s World, and other sporting stores that have all just announced their closing thousands of their doors in order to focus on their more profitable ones. One by one, it may not mean much to the Canadian consumer. But add them up, and you soon have a great deal of unemployment stacked against other negative factors currently effecting the economy, such as high debt loads. And that is exactly what Finance Minister Jim Flaherty has been concerned about happening.

Looking deeper than just the shareholders’ concerns, it seems that this may be a good move on Rona’s part to refuse any offer.

But the shareholder concern can’t go unnoticed. Although Rona stock dropped to $13.50 a share, it was still up 14 per cent in the session; and during that same short period of time it went as high as $14.49 a share during that short time. The drop in share price came during the same time as Lowe’s offer, suggesting that shareholders were in fact, also skeptical of what could happen to the company, and the resulting effects that would bring.

However, even with that small gain, shareholders are growing tired inside of Rona. As you can see from the chart, they have been fairly loyal throughout recent years, even though Rona stocks have been lagging. Now, because of that constant downward swing, many Rona shareholders are happy to sell their shares for a profit. And that’s just what Lowe’s is banking on.

But Lowe’s isn’t prepared to walk away from the proposal with their tails between their legs. They have not only said that approximately 15 per cent of Rona’s shareholders are in favour of the deal; they’re also talking about approaching the shareholders on their own, bypassing Rona’s Board of Directors altogether and pushing the deal through anyway.

“We are disappointed that Rona’s Board of Directors has rejected our friendly non-binding proposal,” said Robert Niblock, president and chief executive of Lowe’s. “[It’s] clearly attractive for Rona shareholders.”

Rona’s biggest competition at the moment in Canada is Home Depot, another American-based company. Lowe’s is hoping that with the acquisition, Rona would be better able to compete with the home improvement giant. Rona on the other hand, thinks that turning some of their box stores into smaller stores in which customers receive better customer service. But is that really more beneficial to customers?

It’s hard to say. Better customer service is difficult to come by these days, and consumers are generally in favour of more service, and better service. But what if they can’t get the product they’re seeking? Even with that stellar service? That’s bound to be a consequence in moving to smaller stores. Will consumers benefit overall should Lowe’s take over Rona? Another one that’s hard to say. While it might give them more options as the new Rona would have a better competitive edge, it could also negatively influence the economy – which negatively influences consumers.

What do you think? Should Rona sell to Lowe’s? Or do you think they should continue to fight the takeover?

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