Canada's Rona scouts U.S. acquisitions

TORONTO Thu Apr 21, 2011 3:32pm EDT

TORONTO (Reuters) - Canadian home improvement chain Rona Inc (RON.TO) could spend as much as C$300 million ($316 million) on U.S. acquisitions this year, taking advantage of a strong Canadian dollar and U.S. economic weakness.

Rona Chief Executive Robert Dutton told Reuters in an interview this week his company is focusing on acquiring U.S. distributors or commercial and professional-orientated units, rather than customer-facing retail stores.

He pointed out that close to 45 percent of the U.S. distribution market for home-improvement products is controlled by independents.

"We realize that we can be the consolidator in this side of the business in the United States," Dutton said. He added that Rona could shell out between C$50 million and C$300 million on one or more targets.

"It's a very fragmented market. It sure is a place for opportunities."

In Canada, Rona is the No. 1 hardware distributor and home-building supply retailer. Through its distribution centers, it sells its products to Rona-branded stores as well as independent retailers that do not use the Rona banner.

Like others in the home improvement sector, it has been hit by a slowdown in consumer spending since the recession with consumers slow to start spending again.

By making a string of acquisitions, the company has still managed to grow, however, recording higher revenue in 2008 and 2010 after a blip in 2009.

A strong Canadian dollar -- near a 3-1/2 year high against the U.S. currency -- and the weakness in the U.S. economy are two key reasons Dutton is looking for growth opportunities in the United States.

It is not the first time a Canadian retailer has targeted the cutthroat U.S. market, where the formula to flourish has not been easy to crack for many.

Canadian companies that have managed to gain a foothold include yoga gear maker Lululemon LLL.TO and convenience store operator Alimentation Couche Tard (ATDb.TO), as well as coffee chain Tim Hortons THI.TO.

"There is a huge opportunity in the United States. There are plenty of independents (Rona) can buy," Edward Jones analyst Brian Yarbrough said. "But that's a whole new element of risk as well"

NOT THE ONLY PRIORITY

Dutton, whose father owned a Rona store when he was a child, said Canada, not the United States, is still the company's priority. To be sure, the C$300 million put aside for U.S. acquisitions represents less than 10 percent of Rona's annual sales.

"The only one big priority is here," said Dutton, 56, who joined the company in 1977.

Rona is expected to make more deals in Canada, where its biggest acquisition to date was that of the Canadian stores of French retailer Rene Depot, which were generating sales of about C$850 million when Rona bought them in 2003.

Dutton said Rona controlled about 19 percent of the hardware and renovation market in Canada in 2010 - more than Home Depot Inc (HD.N) and Lowe's Cos Inc (LOW.N) combined - and he plans to lift that to 25 percent over the next four years.

As in the United States, the Canadian market is highly fragmented, and 50 percent controlled by independents.

Home Depot, the world's biggest home improvement chain, which entered Canada in 1994, has 180 stores and employs 28,000 Canadian staff. Lowe's, which entered the market in 2007, has 25 stores and 4,025 employees in Canada.

Competition comes to a lesser extent from Canadian Tire Corp (CTCa.TO) and Wal-Mart Stores Inc (WMT.N).

Founded in 1939 as Les Marchands en Quincaillerie Ltee, Rona went public in 2002 and has a network of more than 950 outlets, ranging from mom-and-pop stores to big boxes. It has 30,000 employees.

($1=$0.95 Canadian)

(Reporting by S. John Tilak; editing by Pav Jordan and Peter Galloway)

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