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Quebec may intervene to defend Rona from Lowe’s hostile bid

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The Quebec government says it may intervene after Lowe's Cos. Inc. made a $1.8-billion offer for Rona Inc.

In a statement, Quebec Finance Minister Raymond Bachand said the deal is not in Quebec or Canada's interest, and said he is directing Investment Quebec to look at "all steps to counter this bid" - including creating a fund to "protect Quebec's interests."

The Quebec government has contacted Rona to say the province is available to help the company in its takeover fight.

Lowe's offer comes after years of speculation that the marriage of the two retail players made sense in the crowded Canadian sector.

The Montreal-area company said on Tuesday the $14.50 a share offer from its American rival wouldn't be in its shareholders' best interest and Rona will be looking at other options.

Rona (RON-T) received the proposal nearly a month ago, on July 8 and told Lowe's last week -- on July 26 -- that it was rejecting the advance.

Lowe's (LOW-N) confirmed the proposed bid, and said it already has the support of institutional shareholders that own about 15 percent of the stock.

Doug Robinson, head of international operations for Lowe's, said in an interview that the U.S. retailer's CEO first met with Rona's CEO at the latter's initiation last July in Montreal to discuss "strategic options" for the two companies.

They met again 30 days later and, by December, Lowe's sent a proposal for a friendly acquisition of Rona to its board of directors, which the Quebec retailer rejected in early January, Robinson said. The December proposal offered a range of values, and was "slightly" below today's $14.50 a share proposal, he said.

He said that Lowe's, which now has just 31 stores in Canada, has responded to some of Rona's concerns by ensuring that its head office will remain in Boucherville, Que., with no jobs being lost in the province, if the takeover took place.

"We think this is absolutely in the best interests of Canada and Quebec and the business overall," said Robinson, who once headed up the Canadian division. "It creates a very strong and vibrant business that offers great value to its customers throughout Canada. It offers great employment opportunities [and] security of long-term employment for employees."

He said the current offer is simply an expression of interest and not a formal offer. "We are looking for a way to engage the Rona board of directors in a productive discussion about how to create a transaction - create a proposal - that they can support," Robinson said.

Robinson said Lowe's wants to buy all of Rona - both big-box and smaller stores - because it feels having both formats makes sense in today's market. Lowe's only runs superstores in its U.S. home base, but has smaller outlets in its businesses in Australia and Mexico, he said.

"We really like the Rona formats - multiple different formats - we think it makes enormous sense here in Canada," Robinson said. "We can bring some efficiencies and scale and programs and services that previously they didn't have access to at Rona."

For Lowe's, the takeover is important not only to give it scale in Canada but also to provide it with stores in Quebec, where it currently doesn't operate, he said. "We think it is a combination that just makes a lot of sense to everyone."

The move comes as Rona struggles to make gains after a major overhaul this winter in which the retailer shifted strategies, closing more than 20 of its big-box stores as it focused more on smaller, customer-friendly outlets.

Even so, Lowe's, which runs big-box stores, has kept a keen eye on Rona. In March, Robert Hull, chief financial officer at Lowe's, was reported as saying he was open to "all options" when asked if the company would be interested in buying Rona, should it become available.

One major shareholder - giant pension fund Caisse de dépôt et placement du Québec - lost no time in responding to the hostile offer.

In a carefully worded statement, the Caisse didn't say it opposed the bid or that it approved of it either.

Citing its dual mandate of achieving the best returns for its depositors as well as contributing to Quebec's economic development, the $159-billion fund manager said its decision will be guided by several key elements: value creation for its depositors and all shareholders "over the long term, as well as the economic benefits of Rona's head office in Quebec; continuing to develop Rona's supplier network in Quebec and across Canada; and respecting the role of independent entrepreneurs acting as franchisees under the Rona banner.

The Caisse added that it will "follow very closely the evolution of this file as well as the performance of the company."

Industry observers have said for years that it makes sense for Lowe's to swallow some of Rona - its large stores -- to compete with giant U.S. based Home Depot Inc., which has about 180 stores in Canada. All players have been pinched in a soft home improvement market and rocky economy.

The latest proposal may have been just an expression of interest rather than a formal offer, which would have required the company to disclose it earlier, industry observers suggested.

Rona has strongly denied that its company was on the block, even as its shares sank earlier this year. But the stock has been rising in past weeks, prompting suggestions that a takeover may be in the works.

A takeover is attractive because Rona's results have been disappointing. In May, Rona reported its quarterly loss narrowed as it kept a check on expenses, while its sales dropped at its established home-improvement stores - its seventh in a row - although they were less precipitous than a year earlier. But the loss was slightly larger than analysts had estimated.

"Rona is not up for sale. Not part of it, not all of it, not bits and pieces of it. It's not for sale," Chairman Jean Gaulin said at its annual meeting in May.

Shareholders "want to keep this company a Canadian company," Chief Executive Robert Dutton said. "They choose Rona. They don't choose American businesses. And we have to remember that."

The U.S. retailer said it was letting the public know "to allow for all Rona shareholders and other stakeholders to evaluate the numerous economic and commercial benefits outlined in the proposal and to allow for shareholders to communicate their views directly to Rona's board." That suggests Lowe's is poised to take its bid hostile.

Irwin Michael, president of I.A. Michael Investment Counsel, said he's pleased with the proposed offer.

"We are delighted to see a takeover," said Michael, who has owned more than 3.6-million Rona shares in several funds for the past couple of years.

"The fact that 4 million shares traded in the first 22 minutes today tell me that someone is believing in it ... But we also applaud Rona for buying back 10.2 million shares over the last nine or 10 months. They were very astute."

Michael would not comment on whether he is part of the 15 percent of Rona shareholders supporting the Lowe's bid. "Right now we are waiting for more information," he said.

Some fund managers who own Rona shares are cautious about commenting because they don't want to show their hand as to whether they are currently buying or selling shares of the home improvement retailer.

"We are monitoring valuation as the negotiations unfold," Marian Hoffmann, a portfolio manager at Sionna Investment Managers, said in an email. "Rona's results have been depressed in recent years due to a challenging macro environment and increasing competition. We believe that the company's earnings power potential is significantly above its current earnings level."

Rona, once Canada's dominant do-it-yourself retailer, has fared poorly as Lowe's and Home Depot, the two largest U.S. home improvement retailers, have expanded north of the border.

Rona's net loss for the quarter ended March 25 narrowed to $13.3 million, or 10 cents a share, compared with a loss of $17.6 million, or 13 cents, a year earlier. Analysts, on average, had expected a loss of 8 cents a share, according to Thomson Reuters I/B/E/S.

Revenue rose 1.8 percent to $934.9 million, helped in part by stores opened in 2011.

With files from Shirley Won

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