Lowe’s Hires Canadian Lobbyist In The Latest Rona Takeover Saga

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Lowe’s (NYSE:LOW) appears to be unfazed by the political storm it caused in July with its unsolicited $1.75 billion bid for Rona, Canada’s largest home improvement retailer. Rona is based in the Quebec province where politicians, cutting across party lines, have been vociferously protesting the proposed takeover. Rona’s management also has rejected Lowe’s bid outright, saying that it is not in the shareholder’s interests. In order to soften the political opposition before it can even start a takeover battle with Rona, Lowe’s has now hired Robert Evershed of Prospectus Associates to lobby the federal government, effective August 20, according to Canada’s federal lobbying registry. His goal would be to work on gaining approval from the Minister of Industry for Lowe’s acquisition of Rona. ((Lowe’s hires Canadian lobbyist for Rona deal, Reuters))

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Tempest In A Teacup?

Rona’s Board of Directors rejected Lowe’s $14.50 per share offer towards end of July, saying that the takeover offer was not in the best interests of the company or its shareholders. However, it was later revealed that Rona, as well as Richard Bachand, the Finance Minister of Quebec, had been anticipating such an offer and the latter had already apprised the federal government of Quebec’s stand over the issue. Mr. Bachand’s office released a statement opposing the takeover idea because of Rona’s pivotal status as a major employer and key buyer of local goods. He mandated the government’s investment arm Investissement Quebec to weigh action to counter the offer, just as underscoring the strong local factor, Quebec’s largest pension fund Caisse de dépôt et placement du Québec announced that it had boosted its stake in Rona to 14% from 12.18%. Bachand has been calling Rona a “strategic asset” that shouldn’t fall into foreign hands. ((Quebec’s move to shield Rona from Lowe’s takeover could end badly, Financial Post))
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The Quebec government has stressed Rona’s importance to the domestic economy by claiming that almost half of Rona’s purchases are made in Quebec, and almost 85 per cent in Canada. Rona’s retail sales, including franchised, affiliated and other independent stores that make purchases from Rona, total in excess of $6 billion per year. Purchases from its suppliers amount to more than $2 billion a year in Quebec and more than $3.3 billion in Canada. ((Rona’s rejection won’t end takeover bid, Lowe’s says, CBC News))

We think that it is a bit of an overreaction to call what is essentially a hardware store, a strategic asset. We think that that the government’s stance has more to do with the upcoming elections in the province in which it cannot afford to lose ground to the opposition which espouses an extreme version of economic nationalism. A failure to oppose Lowe’s at this point would likely dent the incumbent government’s electoral prospects, while handing over a highly emotive issue to the opposition to milk to its advantage.
Why Is Lowe’s So Keen On A Deal?

The United States market is quite saturated now and higher growth is expected to come from other countries. We think that Canada being the neighboring country, and a prosperous one at that, offers ample opportunities. Lowe’s started in Canada with 7 stores in 2007 and has since then scaled up to 31 but still lags Home Depot, its biggest rival in the States, which has 180 stores there. We believe that Rona’s 800 stores and 14 hardware and construction distribution centers offer an attractive opportunity to Lowe’s to grow inorganically and improve profitability.
Its business in the US has been facing trouble for some time now, given lack of focus on its pricing strategy. Lowe’s adopted a discounts-and-sales business model which came back to bite the company and it has now shifted back to its original “everyday low prices” model, even though it hasn’t helped business owing to changed customer expectations. The bottom-line here is that Lowe’s needs profitable markets to boost earnings and Canada could be that market. ((Lowe’s Rebuffed By Canadian Rival, WSJ))
We believe that this acquisition will divert Lowe’s attention from its base market, the United States, where it has a range of initiatives underway to close the gap with Home Depot. Also, Rona has a complex, differentiated network of small and big stores which bear little resemblance to the uniform big-box stores that Lowe’s already operates in North America. We think that it will take time for Lowe to figure out how to operate in this format effectively. As for the deal itself, we believe that political opposition will taper off if elections bring back the ruling party to power. If opposition parties were to gain power, this deal is highly unlikely to see the light of day.
Lowe’s earned $747 million in Q2 2012. That’s down from $830 million a year ago by nearly 10%. We believe that Lowe’s would be better off arresting this slide by focusing on its American operations.