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While a potential takeover of home retailer Rona (RON-T) by U.S.-based Lowe's faces criticism from across the political spectrum in Quebec, there's a 50-percent chance that retailer Canadian Tire (CTC-T) might move to buy the company, according to analysts at Credit Suisse.
The analysts lay out their case for a potential Canadian Tire-led buyout of Rona as they initiate coverage on the stock with a "neutral" rating and $75 price target.
The combination of Canadian Tire’s strong balance sheet and free cash flow growth in the next two or three years, along with the potential to eliminate a growing competitor paves the way for Canadian Tire to take a run at Rona, Credit Suisse argues.
"We estimate that the acquisition of Rona would be accretive to Canadian Tire’s earnings per share by 8.5 percent to 10.3 percent," David Hartley, analyst at Credit Suisse, says in a note to clients. "Canadian Tire should be able to achieve significantly more in synergies than Lowe’s given i) the scale of its business in Canada and ii) the overlap between Canadian Tire and Rona’s product offering."
A Canadian Tire takeover of Rona would also make life difficult for Lowe’s (LOW-N), as its Canadian operations have failed to gain significant traction in the country, Hartley argues.
"To date, Lowe’s store network in Canada is small (31) and may comprise sub-optimal real estate locations. Lowe’s needs the Rona acquisition for its Canadian business to make a meaningful contribution; otherwise, we would expect it to pack up and leave the country," he says. "If Lowe’s leaves altogether, industry competition lessens somewhat, perhaps providing some relief to [Canadian Tire's] profit margins."
Because Quebec is in the midst of a provincial election and the potential of an extended review of a takeover, Canadian Tire has at least a year to work through the details of buying Rona, Hartley expects.
"This provides plenty of time for Canadian Tire to work with its dealers on a potential bid for Rona," he says.
But the risks to a potential takeover of Rona by Canadian Tire are the difficulties mixing the corporate and franchise businesses, the complexity of adding another business to the company and the higher debt levels it would assume to finance the deal, Hartley says.