Rona Inc. (RONAF.PK) is a Canadian-based distributor and retailer of hardware, home renovation and gardening products. The business has two segments: distribution, and retail and commercial. It has a network of around 800 corporate, franchise and affiliate stores under several banners, and a network of 17 hardware and construction material distribution centers. In addition, it is also engaged in a specialized HVAC market with 60 sales outlets across Canada.
On July 8, the company received interest from Lowe's (LOW) to acquire the whole business for C$14.5 (US$14.91) per share. So the deal is worth C$1.8 (US$1.85) billion. The offer price represented a 36.7% premium to its closing price on July 6. Lowe's believed the combination with Rona would create significant value for all stakeholders. Lowe's also said it would continue deliver the best home improvement products and services in Canadian markets. However, RONA criticized Lowe's proposed takeover, saying that the Lowe's business model is incompatible with theirs. RONA said that the offer of C$14.5 per share undervalued the company. The Quebec government also criticized the bid, as it's not the best interest of either the province or Canada.
Today, Lowe's withdrew takeover plans for RONA. The news made RONA's share price drop more than 8%, to C$11.7 per share at the time of writing. Nevertheless, Lowe's said in the statement early Monday: "Lowe's continues to believe that a combination of Lowe's and Rona makes business sense and would create significant value for all stakeholders… It is unfortunate that the Rona Board of Directors did not recognize the important economic and commercial benefits of this proposal for its stakeholders and for Canada."
In fiscal year 2011, RONA had C$4.8 billion in revenue, C$230 million in operating cash flow and C$121 million in free cash flow. It recognized losses in 2011 because of C$117 million in goodwill impairment and restructuring costs. As of June 2012, RONA had C$1.86 billion shareholders' equity, C$437 million long-term debt and only C$17 million short-term debt.
At the current price of C$11.7 (US$12), the market capitalization is C$1.42 (US$1.46) billion. The enterprise value is C$2 billion. RONA is valued at 6.17x cash flow, 0.76x book value and 16.5x EV/FCF.
I think Lowe's will keep the eye on RONA in the near future, and the offer of C$14.5 (US$14.91) per share can be considered the private intrinsic value for RONA. Patient investors can consider buying RONA at the current undervalued price and speculate on the might-be upcoming offer from its US based competitor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.