Rejecting an unsolicited bid by U.S. home improvement retailer Lowe's (LOW), Canadian competitor Rona Inc. (OTC:RONAF) said today that its board had determined the proposal wasn't in the best interests of its shareholders. As Jerry Seinfeld always said, "Really?" The stock price says this story isn't over. This contest is a perfect example of the battle between investor desire for a short-term catalyst and corporate management's desire to build long-term shareholder value and maintain its independence.
The bid of $14.50 valued RON at C$1.76 billion, representing a premium of about 22% over Monday's close and was 37% of the price ahead of the offer. RON has traded in a 52-week range of C$8.64 to C$11.92.
The Quebec provincial government also stated today that a takeover of Rona is not in the province or Canada's interest, which will make it very difficult for a higher offer to succeed unless Quebec relents. The Quebec finance minister indicated that his government will support Rona management in a takeover fight. In addition, a foreign acquisition of Rona must be cleared by the federal government, which last year blocked the high-profile, $40 billion attempt by Australian BHP Billiton (BHP) to acquire Canadian company Potash Corp (POT). The federal government in Canada can block takeovers using the Investment Canada Act, just as the U.S. government has the power to do in the case of U.S. interests. Coming September elections could result in a change of regime in Canada, in turn reversing potential opposition.
According to The Wall Street Journal, the CEOs of the two companies met last summer at Rona's request, which was followed by Lowe's first offer in December. That offer was rejected by the board. Despite today's latest rejection, Lowe's clearly hasn't given up. Is it just a matter of price, and can a higher offer succeed?
Certainly, Rona's institutional shareholders might welcome the opportunity to cash in. Lowe's asserts that shareholders representing 15% of Rona's shares support its offer for the company. Lowe's further states that it plans to leave Rona's Canadian operations alone, maintaining its headquarters in Quebec and its current mix of stores. Lowe's has to overcome the issue of Canada's desire to maintain its independent business base, persuade the Canadian public that jobs and investments won't decline, and overcome management's desire to remain in place and pursue its own business plan.
A hostile deal clearly will not succeed, so if Lowe's wants to prevail, it likely must increase its offer, gain the support of the Rona board, then get the Rona board to gain governmental support. With a highly motivated buyer, that may well happen. In the meantime, Lowe's credit was put on a credit watch with a negative outlook by S&P, although S&P acknowledged that the potential acquisition might be additive to Lowe's operations. Lowe's stock took some pain today as a result.
Any acquirer must take into account institutional attitudes toward a potential transaction. Laying the proper groundwork with regulatory authorities, governmental bodies, union officials and local opinion leaders is central to success. Conversely, any company that wants to escape a foreign acquirer can marshal these forces to create a virtual poison pill.
Lowe's can still win this fight, but it first must win over Rona management. Investors also can hope for a competing offer that might be more acceptable both to the company and to Canadian constituencies, or for a revised corporate strategy involving greater speed and upside potential. While that's running its course, this is a play for momentum investors willing to take the risk that the deal will never happen.