RON.PR.A Grumblers Get An Ally

The Stirling Funds has issued an Open Letter to Lowes (LOW: NYSE) and to Rona (RON: TSX) – Lowes Bid Undervalues Rona Preferred Shares (RON.PR.A: TSX):

Lowes, a FORTUNE 50 US based multinational company with sales of over $56 billion, has come to Canada to TAKEOVER, TAKE PRIVATE, CHANGE CONTROL of Rona Inc. Why are these descriptions important? Because they mean that certain things happen: common shareholders get a “Take-Over” premium for their shares and directors and officers get paid handsomely (> $40 million) by accelerating payments that would otherwise take many years for them to receive, if at all.

Let’s consider fundamental principles of Canadian and Quebec corporate law. If Rona’s common shares are collectively worth $2.6 billion, than any higher ranking financial instrument is worth at minimum its face or par value. But that is not how the transaction has been structured and as a result retail preferred shareholders will be FORCED to accept $5 per share less than its face or par value of $25. This is OPPRESSIVE.

Moreover, the Rona Board of Directors owe a fiduciary duty of care to all stakeholders. They have addressed the common shareholders’ interests with a > 100% premium, debenture holders which stand to gain better ratings for their interests, and employees by undertaking to maintain employment, but they have failed in their fiduciary duty to preferred shareholders.

In a similar situation in Canada, RioCan REIT preferred shares with almost identical terms as the Rona preferred shares and also with a March 31, 2016 maturity are being redeemed at their par value of $25.

The Caisse de dépôt et placement du Québec, one of Canada’s pre-eminent pension fund managers, supports the deal seemingly knowing that the preferred shares are held principally by Quebec retail investors and Quebec pensioners, the very people the Caisse represents.

Recently, a Quebec-based retail investor who owns Rona preferred shares wrote to the company:

“I feel the Rona board in unanimously recommending the Lowes take-over has failed to act fairly and equitably in the interests of all stake holders and has only acted in the interest of common shareholders”… “Do not short change the small retail investor”.

As background, the Stirling Funds owns Rona preferred shares. We also own Lowes common shares and are supportive of Lowes’ strategic entry into Canada, and its takeover offer of Rona. We believe Lowes has 1) a strong, focused and highly competent management team; 2) are well positioned in their market segments; and 3) will prosper significantly as the economy continues to recover and the housing and renovation cycle normalises. We are not hostile to Lowes (in fact the opposite). Our issue lies in the deal structure. It would seem bad business for Lowes to “short-change” the very group of investors it hopes to win as customers to save a rounding error on a $2.7 billion purchase.


To further support our efforts to seek fair remedies for the Rona preferred shareholders, the Stirling Funds has retained European-based ÖstVäst Advisory, a specialist advisor to global institutions in complex financial and security law matters.

“It is unclear why Lowes would uniquely diminish the value of the Rona preferred shareholders, while handsomely rewarding everyone else” stated Fredrik Skoglund, Partner & Head of Research of ÖstVäst Advisors. “I would assume the Quebec Securities Commission would not wish to establish precedents like this”.


The Stirling Funds are value-focused investment funds based in London, England that hold a portfolio of diversified global securities principally in asset-rich companies trading at a discount to their underlying intrinsic value.

ÖstVäst Advisory, based in Stockholm Sweden is an independent, specialist global advisory firm providing client tailored financial, investment and corporate services.

SOURCE The Stirling Funds

For further information: ÖstVäst Advisory AB, Stockholm, Sweden, Fredrik Skoglund, Partner / Head of Research, +46 70 410 5165,; The Stirling Funds, London, England, Gordon Flatt, Chief Investment Officer, +44 3239 9932,

I have not been able to find any information on the so-called Stirling Funds. Their website has been set up simply for use as a mail-drop. They’re not entirely a joke because last October they issued an Early Warning Report:

Yesterday Stirling purchased sufficient shares of Kicking Horse Energy Inc. (KCK: TSX-V) in the market on the Venture Exchange to increase its ownership to hold 7,630,000 Common Shares representing 12% issued equity.

Kicking Horse was promptly taken over at 4.75 per share, so – assuming Stirling Funds has other investments – there is some heft to the management company.

Gordon Flatt, CIO of Stirling, has made the news before in connection with Inco’s preferred shares:

A $40-million (U.S.) investment in Inco Ltd. has intensified speculation that the Canadian nickel producer is a potential takeover target.

The purchase makes Winnipeg’s Coastal Investment Inc. – run by Gordon Flatt, brother of Brascan’s Bruce Flatt – the single-biggest owner of Inco’s series E preferred shares, the market’s largest preferred issue. Coastal now owns 1.12 million shares, or 12 per cent.

In turn, we can find reference to Coastal Value Fund with respect to their redemption of CVF.PR.A in 2007 and DIV.PR.A later in that year. Bloomberg has a note:

As of February 21, 2007, Coastal Value Fund Inc has gone out of business. Coastal Value Fund Inc. is an equity mutual fund launched and managed by Coastal Corp. The fund invests in the public equity markets of Canada. It invests in the stocks of companies operating across diversified sectors. The fund primarily invests in value stocks of large cap companies. Coastal Value Fund Inc was formed on September 27, 2002 and is domiciled in Canada.

And this eventually leads to a Bloomberg data dump regarding Gordon Flatt – he’s got his thumbs in a lot of pies, although it is not immediately apparent how substantial any of them are.

I have sent an eMail to the indicated address:

Dear Mr. Flatt,

I read your press release with interest and will be reporting on it at later today.

Please tell me a little more about yourself and your firm. Does Stirling Funds have a functional website? What are the AUM and where may I find your historical performance numbers? Ar e you the same Gordon Flatt who has been involved with Copacabana Capital Ltd. and Coastal Value Fund Inc.?


No answer yet, but it’s still early.

Anyway, Assiduous Readers will remember that my post regarding the proposed RON.PR.A arrangement sparked a fair amount of comment – by PrefBlog standards – with several commenters expressing horror at the idea of a preferred share being taken out below par and heaping me with opprobrium for suggesting it was a pretty good deal for holders.

I based that opinion on a comparison with similar issues, so I’ll take the opportunity to update prices for that list:

Ticker Issue
MFC.PR.J +261 17.89 17.00
RY.PR.M 262 18.45 17.70
TD.PF.D 279 19.00 18.85
SLF.PR.I 273 17.45 17.10
BAM.PF.B 263 16.46 16.88
BMO.PR.Y 271 19.35 18.56

So, given that Lowe’s is offering $20.00 for RON.PR.A with its spread of +265, it would appear that so far a good deal has simply gotten better since the announcement date. But it’s still too early to make a decision … the meeting is not until March 31 and if the preferred share market should happen to go up 10% between now and the last minute to vote … well, then, circumstances alter cases, don’t they?

Update, 2016-3-9: Barry Critchley has taken up the story:

The battle for the support of Rona’s preferred shareholders — who in the takeover by Lowe’s are being offered $20 per share, a $5 discount to the original purchase price — is set to get a little more interesting three weeks before all parties gather in Montreal to approve the transaction.

This week, and possibly as early as Thursday, more information is expected to be released about the extent of the opposition to the terms offered to the pref shareholders. “We have had lots of emails and calls from retail investors about the situation and we will be responding,” said an adviser with knowledge of what’s being planned.

Maybe the circumstances are different but there is a precedent that doesn’t look too good for Lowe’s. In early 1987, Australia’s Fosters Brewing acquired Carling O’Keefe. For some reason, it decided not to acquire the preferred shares that had been issued by Carling. Led by a brewery analyst Mike Palmer and with heavy lifting from Sheila Block of Torys, an action was brought based on improper treatment of Carling’s preferred-shareholders. In time the courts in Ontario found the conduct of the directors of the amalgamated corporation to be “oppressive” to the preference shareholders. After that ruling the pref shareholders got their proper reward.

I’ve looked it up and, while ready to be corrected, suggest that the Carling-Fosters case is irrelevant:

In Palmer v. Carling O’Keefe, Carling O’Keefe amalgamated with a company established by Elders to acquire Carling O’Keefe. The Court was asked to consider the impact of the amalgamation on the holders of the preference shares of Carling O’Keefe. The object of amalgamating the two companies was to move the debt incurred to make the acquisition into Carling O’Keefe. In order to protect the interests of the preference shareholders, sufficient funds to redeem the preference shares were set aside in a separate trust account. The Court decided that the transaction had no business purpose for Carling O’Keefe. It concluded that the transaction served the interests of the controlling shareholder and was unfairly prejudicial to, and unfairly disregarded the interests of, the preference shareholders and that the directors of Carling O’Keefe had breached their duty to act for the benefit of the corporation as a whole. The oppression remedy is discussed in greater detail in Section 7 of this part of the chapter.

In Palmer v. Carling O’Keefe, discussed above, the Court found that there was no bad faith involved in the decision to amalgamate the two companies, and that the board, composed of experienced business people acting upon independent advice, had exercised its best business judgment with respect to the transaction. The Court concluded that the impugned conduct nevertheless constituted oppression because it was unfairly prejudicial to the interests of the holders of preference shares and because it only served the interests of the controlling shareholder and not the interests of the corporation.

It seems to me that this precedent explains why the BCE preferred shares were to be redeemed in the BCE-Teachers’ deal, since in that case BCE was to be loaded up with LBO debt (see Responding to an Amalgamation Squeeze-out under the OBCA); but it doesn’t seem applicable here.

3 Responses to “RON.PR.A Grumblers Get An Ally”

  1. mc says:

    Don’t you think Lowes is going to acquire without incurring debt and loading up a Cdn sub to utilize its interest deductions. Don’t you think amalgs and reorgs will occur in due course. And who really is leading the quixotic bid – the G&M or the FP?

  2. jiHymas says:

    Don’t you think Lowes is going to acquire without incurring debt and loading up a Cdn sub to utilize its interest deductions. Don’t you think amalgs and reorgs will occur in due course.

    All such analysis belongs to the realm of “Special Situation”; in the absence of any unusual (and often illegal!) insight into the inner workings of the firm, taking a strong view one way or the other is a crapshoot.

    I consider the probability of RON.PR.A to be redeemed at par in the foreseeable future to be negligible due to economic factors. I consider the potential for Lowes’ to accidently trigger the ‘shareholder oppression’ judgement illustrated with the Carling-Fosters deal to be negligible on the basis that they have a lot of high-priced help on hand to avoid it.

    If you choose to take a different view, go ahead. In the absence of any compelling argument to support such a view, I will say that this is not an investment thesis on which I would risk any money.

    While it is likely that RON.PR.A will be redeemed ‘eventually’ if the proposed Plan of Arrangement fails, I suggest that this will take a fairly long time; and that investors in the comparables to which I refer in the post will almost certainly do better through the period. That’s my investment thesis with respect to RON.PR.A and I do not as yet see any reason to modify it.

    And who really is leading the quixotic bid – the G&M or the FP?

    I’m afraid I don’t understand what you mean.

    So much for Rona buying them back…

    This reset – which takes effect the day of the vote – was discussed on PrefBlog in the post RON.PR.A To Reset (ha-ha!) at 3.324%.

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