{"id":32320,"date":"2016-02-04T01:58:23","date_gmt":"2016-02-04T06:58:23","guid":{"rendered":"http:\/\/prefblog.com\/?p=32252"},"modified":"2016-02-04T01:58:23","modified_gmt":"2016-02-04T06:58:23","slug":"ron-pr-a-lowes-offers-20-as-part-of-takeover","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=32320","title":{"rendered":"RON.PR.A: Lowe's Offers $20 As Part Of Takeover"},"content":{"rendered":"

Lowe\u2019s Companies, Inc. and RONA Inc. have announced<\/a>:<\/p>\n

that they have entered into a definitive agreement under which Lowe\u2019s is expected to acquire all of the issued and outstanding common shares of RONA for C$24 per share in cash, and all of the issued and outstanding preferred shares of RONA for C$20 per share in cash. The total transaction value is C$3.2 billion (US$2.3 billion) (the \u201cTransaction\u201d). The offer represents a premium of 104 percent to RONA\u2019s closing common share price on February 2, 2016 and a 38 percent premium to RONA\u2019s 52-week high of C$17.36. Together, Lowe\u2019s Canada and RONA stores will create Canada\u2019s leading home improvement retailer with 2015 pro forma revenues from Canadian operations of approximately C$5.6 billion. Excluding transaction and integration costs, we anticipate the Transaction will be accretive to Lowe\u2019s earnings in the first year following the close of the acquisition.<\/p>\n

The Transaction has been unanimously approved by the Boards of Directors of Lowe\u2019s and RONA and is supported by the management teams of both companies. The Transaction is expected to proceed by way of a plan of arrangement by which Lowe\u2019s would acquire all of the outstanding shares of RONA, subject to RONA common shareholder approval and satisfaction of customary conditions, including the receipt of all necessary regulatory approvals. The RONA Board has received an opinion from Scotia Capital Inc. that the consideration to be received by RONA\u2019s common and preferred shareholders pursuant to the Transaction is fair, from a financial point of view.<\/p>\n

The RONA Board will recommend that RONA shareholders vote in favor of the plan of arrangement at a special meeting of shareholders expected to be held before the end of the first quarter of 2016. Further information regarding the Transaction will be included in RONA\u2019s information circular to be mailed to RONA shareholders in advance of the special meeting. The arrangement agreement provides that RONA is subject to customary non-solicitation provisions.<\/p><\/blockquote>\n

$20 is quite the premium over yesterday’s closing quote of 12.41-05!<\/p>\n

The consensus is that the deal will succeed – f’rinstance, Frederic Tomesco of Bloomberg<\/a>:<\/p>\n

The fact both boards agreed to the C$3.2 billion ($2.3 billion) offer, along with Lowe\u2019s commitment to preserve head-office jobs and maintain supply agreements, will likely seal the deal. Political conditions in Canada\u2019s second-most populous province also favor the acquisition after helping to scupper a hostile offer in 2012.<\/p>\n

Rona\u2019s biggest shareholder, the provincial pension fund manager Caisse de D\u00e9p\u00f4t et Placement du Qu\u00e9bec, said Wednesday it would tender its shares to the offer. Quebec\u2019s new economy minister indicated the government probably wouldn\u2019t stand in the way of a deal.<\/p>\n

\u201cIf three of the groups that were against Lowe\u2019s last time — the board, the government and the Caisse — are saying it\u2019s a good idea, it would be hard to see it not get the green light,\u201d Karl Moore, a management professor at McGill University\u2019s Desautels Faculty of Management in Montreal, said in a telephone interview. \u201cThere\u2019ll be some squawking for sure, but that\u2019s predictable. The opposition has to be against this deal in principle.\u201d<\/p><\/blockquote>\n

Matthew Townsend and Scott Deveau of Bloomberg point out that the plunging loonie helped a lot<\/a>:<\/p>\n

The Canadian dollar\u2019s loss is Lowe\u2019s gain.<\/p>\n

After being rebuffed in its attempt to buy Quebec-based retailer Rona Inc. in 2012, Lowe\u2019s Cos. reached agreement on Wednesday to buy it for C$3.2 billion ($2.3 billion). Two big changes in the past four years made the transaction possible: The Parti Quebecois, which opposed the original deal, is out of power, and the loonie fell to its lowest level against the dollar in more than a decade.
…<\/b>
Lowe\u2019s withdrew the $1.8 billion unsolicited bid for Rona in 2012 after the board and some Quebec politicians opposed the offer, concerned about a loss of jobs and local control in the French-speaking province. The withdrawal came just 12 days after the separatist Parti Quebecois won elections.<\/p>\n

Since then, the Liberals have taken power in Quebec, and the loonie has dropped to 72 cents versus the U.S. dollar, compared with parity when Lowe\u2019s pulled its bid, making it cheaper for Lowe\u2019s to offer a richer premium. So while the C$24 a share bid in Canadian dollar terms is about 65 percent higher than the C$14.50 a share bid that was rejected, in U.S. dollar terms the offer is just 16 percent higher.<\/p><\/blockquote>\n

\"CADUSD\"<\/a>
Click for Big<\/i><\/div>\n

… and Bloomberg’s Brooke Sutherland suggests it’s all about footprint<\/a>:<\/p>\n

Focusing on Canada may be a distraction, but it’s a distraction that could pay off for Lowe’s. While the home-improvement company has benefited from a rebounding real estate market, the maturing U.S. retail landscape and the rise of online shopping puts a cap on the growth opportunities for big-box vendors. Many are shuttering stores, or at least slowing down expansion.<\/p>\n

Lowe’s, for example, had 1,793 U.S. locations as of January 2015 — a gain of about 76 from a year earlier, much of which could be explained by the acquisition of Orchard Supply Hardware. The way to keep growing its store base is to make more acquisitions and push harder into adjacent markets such as Canada, where Home Depot currently has almost five times as many locations as Lowe’s. With Canada’s home improvement industry valued at C$45 billion, Lowe’s can’t really afford to sit on the sidelines.<\/p><\/blockquote>\n

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Click for Big<\/i><\/div>\n

John Heinzl was kind enough to quote me when discussing the preferred share part of the deal<\/a>:<\/p>\n

Rona Inc.\u2019s battered preferred-share investors may not be getting as fat a premium as common shareholders in the $3.2-billion takeover by Lowe\u2019s Cos. Inc., but they should be thrilled with what they\u2019re being offered, money managers say.<\/p>\n

As part of the deal, the U.S. home-improvements chain is offering $20 for each Class A rate-reset preferred share of Quebec-based Rona. The offer, which is based on a fairness opinion from Scotia Capital, represents a 59-per-cent premium to the closing price of Rona\u2019s preferred shares before the deal was announced.
…<\/b>
Some Rona preferred shareholders said it\u2019s possible Lowe\u2019s might make a higher offer for the preferreds. \u201cPerhaps they could be persuaded to offer more money. Perhaps. I\u2019m not banking on it but not discounting it either,\u201d said Benj Gallander, co-editor of Contra the Heard Investment Letter. \u201cThese are early days.\u201d<\/p>\n

Don\u2019t hold your breath, said preferred-share fund manager James Hymas, president of Hymas Investment Management. Rona\u2019s preferred shareholders don\u2019t have the leverage to squeeze more money out of Lowe\u2019s, he said.<\/p>\n

\u201cThey can always try, but I don\u2019t know how far they\u2019ll get,\u201d said Mr. Hymas, who does not own Rona\u2019s preferred shares.
…<\/b>
After all the suffering Rona\u2019s preferred investors have endured, they should be happy that Lowe\u2019s is willing to take them out at $20, Mr. Hymas said.<\/p>\n

\u201cYou don\u2019t want to kill the goose that lays the golden egg,\u201d he said. \u201cThey\u2019re not going to sweeten that deal. There is no reason to.\u201d<\/p><\/blockquote>\n

I base this view on the fact that during the conference call the following statements were made:<\/p>\n

what’s important to understand that a positive vote from the pref holders is not a condition precedent to the closing of the transaction.
…<\/b>
If you don’t have a majority acceptance from the prefs, does RONA continue to report its financial results? … Yes. So the entity would need to continue to report as a public listed entity. Yes.<\/p><\/blockquote>\n

So a negative vote from RONA preferred shareholders will mean just that the shares will continue to be outstanding. Since RON.PR.A is a FixedReset, 5.25%+265, that commenced trading 2011-2-22<\/a> after being announced 2011-2-1<\/a>, it has a relatively low reset. Absurdly low for junk, albeit more reasonable for investment grade. Investment-grade issues with comparable resets are:<\/p>\n