* Lowe's offers C$14.50/shr for Canada home improvement
* Rona rejects offer, focuses on own turnaround plan
* Quebec government says deal not in Quebec, Canada interest
* Rona shares rise about 14 pct, Lowe's down 5 pct
By Euan Rocha and Dhanya Skariachan
July 31 Lowe's Cos, the world's No. 2
home improvement chain, wants to spend C$1.8 billion to buy
Canadian competitor Rona Inc, but the struggling
Canadian retailer publicly rejected the offer on Tuesday and
said its own turnaround plan offered a better chance of success.
Rona, Canada's home-grown answer to Lowe's and Home Depot
Inc, said the C$14.50 a share proposal was not the best
deal for its shareholders. Smarting from years of disappointing
sales, it wants to close some of its big box stores and focus on
smaller outlets that it says its customers prefer.
At stake is both Rona's long history as an independent
company deeply rooted in Quebec, and Lowe's attempt to kickstart
its Canadian expansion by acquiring hundreds of stores and a
large national distribution network.
Lowe's said its plan has the support of institutional
shareholders with about 15 percent of Rona's outstanding shares.
Its July 8 proposal represents a 36.7 percent premium to the
stock's closing price on Friday, July 6.
North Carolina-based Lowe's sees a deal with Rona as a way
to fight Home Depot in Canada, where the domestic economy has
been relatively strong, and the housing market never experienced
the crash seen in the United States.
Acquiring Rona would also give Lowe's a chance to build up a
presence in Rona's home province of Quebec, where the U.S.
company has no operations at all.
"We are disappointed that the Rona board said no," Doug
Robinson, Lowe's head of international operations and
development, told Reuters in an interview. "We really want to
take a little bit of time to consider options."
But the proposal is already facing political opposition in
Quebec, where the ruling Liberals will face a tough challenge
from the pro-independence Parti Quebecois in an election
campaign expected to start this week.
Quebec Finance Minister Raymond Bachon said the offer was
not in the best interest of either Canada or Quebec and he has
asked economic development agency Investissement Quebec to work
out what could be done to counter the proposal.
Provincial views are not a determining factor in foreign
takeovers, but competition lawyers said federal officials
reviewing the deal would pay heed to provincial views.
"Traditionally the federal government has been very
sensitive to Quebec's needs and desires," said one lawyer, who
specializes in regulatory reviews and competition law and who
asked not to be named due to possible conflicts of interest.
"It seems that people pay special attention, when Quebec
voices its views, especially when it is in relation to companies
that are headquartered in its province."
Under the Investment Canada Act, Ottawa can review any
foreign investment worth more than C$330 million and can block a
deal it thinks is not in Canada's best interests. It has
exercised that prerogative only twice, most recently in 2010
when it said BHP Billiton's hostile bid for Canadian
fertilizer maker Potash Corp was not of net benefit.
Rona shares rose as high as C$14.49 before easing back to
C$13.50, a gain 13.7 percent, as investors lowered their
expectations of a deal being struck in the face of Quebec's
objections. Lowe's stock was down 4.8 percent at $25.58.
Morningstar analyst Peter Wahlstrom saw little chance that
Lowe's would approach shareholders with a hostile bid.
Boucherville, Quebec-based Rona has struggled as Home Depot
and Lowe's have made inroads into its home turf. Sales at Rona's
established stores, or same-store sales - a key measure for
retailers - dropped 7.3 percent in the year ended Dec. 25, 2011.
Rona has blamed its weak performance on poor consumer
confidence, and its recovery plan centers on closing or
splitting up 23 of its 79 biggest outlets and focusing on
smaller "satellite" and "proximity" stores.
Rona spokeswoman Michelle Laberge said a special committee
of the board had considered Lowe's offer.
"They believe that the plan that we have announced and that
we are rolling out right now has greater potential to create
more value in the mid- to long-term," she said.
Neither Home Depot nor Lowe's break out Canadian results, so
it hard to compare their performance to that at Rona. But in its
last two reported quarters, Home Depot said same-store sales
rose in Canada.
A YEAR OF TALKS
Lowe's said the two companies' chief executives first met in
July 2011, at Rona's request, "to discuss a potential
relationship." Rona's board rejected an earlier proposal from
Dec. 15, 2011, was rejected by Rona's board, and Robinson said
the new offer was "marginally" higher than the December one.
Lowe's operates more than 1,745 stores in North America,
including 31 in Canada. Bigger rival Home Depot, which has been
in Canada more than a decade longer, has 180 Canadian outlets.
Rona, founded in 1939 by independent hardware stores in
Quebec , operates nearly 800 locations and supplies almost 1,500
stores in Canada. Its stores are mostly smaller than Lowe's
outlets and many Rona dealers are family businesses with a long
history in the network, and a stake in the public company.
"I have read many comments where people said that Lowe's
would not be interested in the smaller format or the dealer
businesses. That is just factually incorrect," said Robinson.
Rona's biggest shareholder is pension fund Caisse de dépôt
et placement du Québec, which said on Tuesday it had raised its
stake in the company to 14.18 percent. It said it will evaluate
the offer based on the value it creates for its depositors and
shareholders, but also factor in the importance of the
continuing development of Rona's Quebec supplier network.
Caisse, formed nearly five decades ago by the government of
Quebec to manage the funds of the Quebec pension plan, also has
a mandate to contribute to the province's economic development.
Speculation about Lowe's intentions came front and center in
early April when one of its top executives told Reuters that
Rona was a "very interesting company."
Rona insisted it was not for sale.
But even before Tuesday's news, the stock had risen 12
percent in three months, partly on hopes that Lowe's might bid.
Scotiabank and BMO Capital Markets are acting as Rona's
financial advisors, with Norton Rose Canada LLP and Davies Ward
Phillips & Vineberg acting as its legal advisors.
Lowe's financial advisors are CIBC World Markets and Bank of
America Merrill Lynch, and Stikeman Elliott and Hunton &
Williams are acting as its legal advisors.