LOW Lowes Companies Inc

   (FROM THE WALL STREET JOURNAL 2/4/16) 
   By Austen Hufford 

Lowe's Cos. Chief Executive Robert Niblock tried to engineer a purchase of Canadian home-improvement chain Rona Inc. in 2012, but he was snubbed.

Instead of walking away, he waited for the right moment to try again.

Four years later, he's struck his deal. Lowe's said Wednesday it would buy Rona in a transaction valued at 3.2 billion Canadian dollars ($2.3 billion), which values its shares at double Rona's stock price on Tuesday, and 81% above the unsolicited offer Mr. Niblock made in 2012.

Mr. Niblock said the price was justified by Rona's performance, noting that "they've done quite a bit to improve their operations."

Rona's acceptance of the deal is a turnaround from the cold shoulder Lowe's got in 2012.

That offer, for C$1.76 billion (about $1.75 billion at the time), represented a 37% premium over Rona's stock price, but Rona said it wasn't in the best interests of the company or its shareholders.

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

With the deal Wednesday, Lowe's said it agreed to several stipulations related to keeping jobs and operations in Canada.

Lowe's said it would keep the "vast majority" of current employees and executives and would base Lowe's Canadian operations in Boucherville, Quebec, Rona's home.

It will continue to use Rona brands and local supply chains.

Rona's largest shareholder with a 17% stake, the provincial pension fund Caisse de Depot et Placement du Quebec said on Wednesday that it supported the transaction.

Still, the deal will require approval from Canada's antitrust authority, known as the Competition Bureau, and Lowe's needs to show that the deal would generate economic benefit for Canada under the country's foreign-takeover rules.

Despite the cultural and economic similarities to the U.S., Canada has been a difficult market to crack for some U.S. companies, and investors showed some skittishness in that regard, sending Lowe's shares down 6% Wednesday.

Sears Holdings Corp., for example, spun off most of its stake in Sears Canada Inc. in 2014, and the Canadian unit has continued to experience a decadelong annual revenue declines.

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

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."

Mr. Niblock noted that Lowe's, which already runs 42 stores in Canada and has been in the country since 2007, was "very disciplined with our expansion plans to ensure we understood the nuances in the market."

Most of Lowe's Canadian stores are in Ontario, and it has none in Quebec, where most of Rona's stores are located.

Rona sells and distributes hardware, home-renovation products and building materials.

The company has a network of 236 corporate and 260 dealer-owned stores under various brands serving professional contractors and do-it-yourself consumers.

Lowe's said it expects combined Canadian operations to represent about 7% of its total annual revenue.

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 company expects the deal 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.

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Ben Dummett contributed to this article

(END) Dow Jones Newswires

February 04, 2016 02:48 ET (07:48 GMT)

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