LOW Lowes Companies Inc

By Austen Hufford 

Lowe's Cos. said it would acquire Canadian home-improvement chain Rona Inc. for about 3.2 billion Canadian dollars (US$2.3 billion) in a move to expand its operations in Canada, less than four years after Rona rebuffed a buyout offer from the home improvement chain.

Lowe's will pay about C$24 (US$17.15) for each outstanding common share and C$20 for each outstanding preferred share of Rona. The deal may include debt. The price represents a 104% premium over Rona's closing common share price of C$11.77 on Tuesday.

Rona shares nearly doubled to $23.37 in trading on the Toronto Stock Exchange, while Lowe's shares fell 8.6% to $65.49 in trading in New York.

Michael Baker, a senior analyst with Deutsche Bank, said the Canadian expansion could take resources and executives' time and thought away from Lowe's main business.

"There is concern this could be a distraction." Mr. Baker said. "It seems less risky for Lowe's to focus on its core U.S. business."

Despite the cultural and economic similarities to the U.S., Canada has been a difficult market to crack for some U.S. companies. Sears Holdings Corp. spun off most of its stake in Sears Canada Inc. in 2014 and the Canadian unit has continued to experienced a decade-long string of annual revenue declines.

Target, after spending the equivalent of more than $4 billion setting up its Canadian operations, ended its money-losing operation and shut down its more than 130 stores in the country in early 2015.

Perry Sadorsky, Associate Professor of Economics at the Schulich School of Business in Toronto, said with that Target, many Canadian consumers had expected similar products and prices as in American Target stores and didn't find them.

But he noted that Lowe's has been in Canada since 2007 and that Rona is already profitable.

Rona sells and distributes hardware, home-renovation products and building materials. The company operates a network of 236 corporate and 260 dealer-owned stores with nine distribution centers throughout Canada.

Rona's acceptance of the deal is a turnaround from the cold shoulder it gave Lowe's previous 2012 offer to buy the company for C$1.76 billion (worth about US$1.75 billion at the time). That offer represented a 37% premium over Rona's stock price. At the time, Rona said the unsolicited proposal wasn't in the best interests of the company or its shareholders.

In response to the higher cost and higher premium of the new deal, Lowe's Chief Executive Robert Niblock said Rona is worth more today.

"They've done quite a bit to improve their operations" Mr. Niblock said on a call to discuss the deal. In an interview with The Wall Street Journal, Mr. Niblock said, "we are in a much different place than where we were last time."

The 2012 offer also faced challenges from the Quebec government, with its then finance minister telling reporters that Rona was a "strategic asset" that shouldn't fall into foreign hands.

Lowe's current bid includes key differences that may increase its chances of success this time. Lowe's said it agreed to several stipulations related to keeping jobs and operations in Canada. Lowe's said it would keep employing the "vast majority" of current employees, will base Lowe's Canadian operations in Boucherville, Quebec, and will continue to use Rona brands.

The latest offer requires approval from Canada's antitrust authority, known as the Competition Bureau, and it needs to show that the deal would generate a net economic benefit for Canada under the country's foreign-takeover rules.

Unlike the previous unsolicited proposal, the offer was friendly and has the unanimously support of both companies' boards. Mr. Niblock, Lowe's CEO, said in the interview that Lowe's had been following the progress of Rona over the past several years and that he reached out to Rona's chairman in 2015.

Citing in part Lowe's commitments to its presence in Quebec, Caisse de Depot et Placement du Quebec, the giant provincial pension fund, said it supports the transaction. The Caisse is Rona's largest shareholder with about a 17% stake, according to FactSet data.

Since 2012, the Canadian dollar has depreciated against the American dollar falling from roughly parity to C$1.39 for each US$1, making the deal relatively cheaper for Lowe's.

Lowe's Canada, which entered the country in 2007, now operates 42 stores, primarily in Ontario. Lowe's doesn't have any stores in Quebec and the company didn't previously have plans to expand eastward. Almost half of Rona's stores are in Quebec.

With the Rona acquisition included, the Canadian operations would have had revenue of C$5.6 billion in 2015. French-speaking Sylvain Prud'homme, a Canadian retail veteran and president of Lowe's Canada, will continue to head the Canadian operation after the acquisition. Mr. Prud'homme's hiring in 2013 was seen at the time as a sign that Lowe's hadn't given up on Rona.

The deal is expected to close in the second half of the year and will add to Lowe's earnings. Lowe's said it has identified ways to get more than C$1 billion of increased revenue and operating profitability in Canada, including using shared suppliers and introducing appliances into some Rona stores.

Recently, Lowe's has benefited from higher home values and more people moving into new homes, which both spur spending on home projects.

Ben Dummett in Toronto contributed to this article

Write to Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

February 03, 2016 13:58 ET (18:58 GMT)

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