On Sept. 17, a clearly frustrated Lowe’s Cos. withdrew its $14.50-per-share proposal to buy Canadian hardware chain Rona Inc. In a terse press release, the American company said it was “unfortunate” that Rona’s board of directors didn’t recognize “the important economic and commercial benefits” of the proposal and the value it created for shareholders.
As upset as Lowe’s may be, it got off easy compared to Rona’s investors who, over the past five years, have seen share prices fall 48%. Lowe’s proposal was just what they needed—in the 31 days after the July 8 offer, Rona’s share price climbed 31%—and many of its major shareholders, including Invesco Canada, which owns a 12% stake, backed the bid.
Now, though, people are wondering what to do next. Sell the stock or wait and see if something else comes along? Irwin Michael, president of Toronto’s ABC Funds, is still contemplating his next move, but he’s finding it harder to see the upside. “It appears no price was there to satisfy the board of directors, and there were no good-faith negotiations,” he says. “They’re elected to maximize shareholder value, so how can they rationalize that, by not engaging with Lowe’s, shareholders are better off?”
The Quebec government’s interference is also hard for Michael to stomach. Other retailers, such as Hudson’s Bay Co., have been sold to Americans with little fuss.
Analysts are scratching their heads too. A CIBC report said that “it is abundantly clear that Rona’s board and management do not want to sell, and with the largest shareholder seemingly on board, the path to a deal is unclear and full of obstacles.” An RBC report pointed out that shareholders would certainly benefit from a deal; without one, a slowing Canadian housing market will add pressure to Rona’s top line. The company is closing money-losing stores and redeveloping others, but observers see little scope for organic earnings growth in the short to medium term.
Despite numerous red flags, the stock price fell only 12% after the proposal was taken off the table, which means it’s still up 15% year-to-date. That suggests that investors haven’t given up on a deal. Michael wants to hear what management has to say before deciding what he’ll do. He may wait until the annual meeting next spring to see if shareholders take matters into their own hands. There’s also a possibility of another, hostile takeover. In its statement, Lowe’s did say that it “continues to believe that a combination of Lowe’s and Rona makes business sense and would create significant value for all stakeholders.” National Bank analysts wrote in a report that they still believe Lowe’s is interested in Rona, but “we think that the likelihood of a successful transaction has decreased.”
ABC Funds senior analyst Dana Merber believes something else must be going on. Otherwise, this story makes no sense. “The board really does have to answer for their course of action,” he says. “They’d better have something else up their sleeves.”
For now, investors seem to be playing the waiting game. Merber wouldn’t fault someone for selling, but there may be a better course of action at this point. “If someone ever wanted to take an activist type of role, now’s the time to do it,” he says.