Rona takes rebuilding step with $215 million sale of comercial division

MONTREAL – An effort to rebuild struggling hardware retailer Rona is moving ahead with the planned sale of its commercial and professional division for $215 million.

The operations, which focused on plumbing, heating, ventilation and air conditioning systems, will be acquired by EMCO subsidiary Talisker Plumbing Corp., the company announced Thursday. Rona (TSX:RON) created the division when it acquired commercial trades supplier Noble in 2007.

“It’s one step in the right direction,” said chief financial officer Dominique Boies.

“The biggest factor (in the sale) is to focus internally on running what we’re really good at, which is a retail, hardware operation and really focusing on the profession and the contractor business in lumber and building materials.”

Although the division contributed less than 10 per cent of the company’s overall revenues, it required a lot of capital and attention from executives, Boies said.

The sale is the Montreal-area company’s first major transaction since new chief executive Robert Sawyer stepped into the role in April after holding various other positions in the retail industry.

He plans to unveil his strategy to turn around the retailer in August, but told shareholders last month that the chain has decided not to sell its network of big box stores outside Quebec even as it focuses on smaller, proximity stores.

The agreement was reached after Rona opened a bidding process to interested buyers. The sale price was fair considering similar transactions in the industry, Boies said.

Rona has been struggling for years because of weak consumer spending amid slow economic growth and concerns about unemployment. It rebuffed a takeover bid last summer from U.S. rival Lowe’s and faced the departure of its veteran CEO. Rona also dodged a shareholder revolt by replacing much of its board of directors.

The current strategic plan calls for the closure of 10 underperforming big box stores and reducing the size of 13 others.

In Quebec, the company is repositioning its Reno-Depot banner as a warehouse by reducing the number of products, but offering bigger quantities at better prices.

Rona said it has achieved $17 million of savings, or about 40 per cent of the up to $45-million target from administrative job cuts and the renegotiation of major service agreements.

While the company is expected to rework other parts of its opertaions this year, a turnaround will take 18 to 24 months to achieve, Boies cautioned.

“The changes don’t happen overnight and this doesn’t translate overnight in financial results,” he added.

Mark Petrie of CIBC World Markets said the division’s sale was expected for around the final price.

“This divestiture represents a step forward in Rona’s turnaround,” he wrote in a report.

“The commercial segment was not core to the business, and after the departure of a key executive one year ago, was an increasing distraction from the retail and distribution businesses.”

The sale is subject to regulatory approvals from the Competition Bureau and Investment Canada. The transaction is expected to close before the end of October.

Proceeds from the transaction will initially be used to pay down debt, but could eventually be distributed to shareholders by repurchasing shares, said Boies.

The professional and commercial division has 1,400 employees in Ontario, Quebec and British Columbia operating under the Noble, Don Park, MPH Supplies, Boutique Eaudace and Boutique Plomberie Decoration 25 banners.

Its profitability was initially superior to the rest of Rona’s business, but has since slipped. Petrie estimated its annual EBITDA at $30 million to $35 million, but Boies said it’s much lower. The amount will be disclosed in the second quarter results when Rona expects to record a pre-tax loss of about $125 million in the second quarter mostly related to a non-cash write-down of the division’s goodwill.

EMCO, based in London, Ont., is a wholesaler and distributor of products for the construction industry. It sells products across Canada in plumbing and heating, waterworks, industrial, oilfield supply, irrigation, fire protection and HVAC/R (heating, ventilation, air conditioning and refrigeration).

Rona operates a network of more than 800 retail stores and 14 hardware and construction materials distribution centres. It has nearly 28,000 employees and generated $4.9 billion of annual revenues.

On the Toronto Stock Exchange, its shares lost 11 cents to close at $10.13 on Thursday.