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Lowe’s shakes up Canada’s home reno market with $3.2B Rona deal

More than three years after it tried and failed to buy Rona (RON.TO), Lowe's (LOW.N) has reached an agreement to buy the Quebec-based home renovation chain. The deal comes at a 104 per cent premium to Tuesday's closing price. It could shift the retail landscape’s balance of power -- and signals Lowe's doesn't see Canada’s real estate boom ending any time soon.

The last time Lowe’s tried to buy Rona it received flak from Quebec politicians and opposition from some Rona dealers.

Lowe’s said in a statement Wednesday morning it has pledged “important commitments to Rona’s key Canadian stakeholders” and that Lowe’s would locate its Canadian head office in Boucherville, Que., where Rona is headquartered.

Sylvain Prud’homme, who heads Lowe’s Canadian operation, would become president of Lowe’s Canada.

Under the deal, Lowe’s would acquire all of the issued and outstanding common shares of Rona for $24 a share in cash and all the issued and outstanding preferred shares of Rona for $20 a share in cash.

The offer represents a premium of 104 per cent to Rona’s closing common share price on Feb. 2.

Lowe’s $1.8-billion bid for Rona in 2012 fell flat after strong resistance from the Quebec government, setting the stage for a high-stakes battle in the province as some powerful shareholders backed the $14.50-a-share offer.

In a controversial move, the Quebec finance minister at the time described Rona as a “strategic interest” and opposed the acquisition by Lowe’s in the belief it would harm Rona’s 15,000 employees in the province and its suppliers.

Rona itself had rejected Lowe’s offer.

On Wednesday, Lowe’s and Rona said each of their boards of directors had unanimously approved the latest deal, which is a 38-per-cent premium to Rona’s 52-week high of $17.36.

“We believe the time is right to take the next step in the evolution of the Rona family,” said Rona chairman Robert Chevrier. “The team at Lowe’s has presented us with an excellent plan that enables our company to maintain its brand power while at the same time leveraging Lowe’s global presence to build upon and expand our reach.”

He pointed to benefits in the deal, including the commitments that Lowe’s made to Rona employees; potential new markets for Canadian manufacturers; and product offerings for Rona’s independent dealers.

Lowe’s said it can potentially double its operating profit in Canada in five years.

The U.S. retailer said it has identified more than $1-billion of opportunities to further increase revenue and operating profit in Canada. They include expanding customer reach and serving a new portion of the market by applying Lowe’s expertise in some product categories such as appliances. It also said it could strengthen operations by using Lowe’s strengths as a leading omni-channel home improvement company, selling both from physical stores and online.

Lowe’s said it can also increase profit in Canada by taking advantage of shared supplier relationships and better scale, as well as Lowe’s private label savvy.

Among its commitments to Rona, Lowe’s said it has agreed to continue to employ “the vast majority” of Rona’s current employees and “maintain key executives” from the Quebec-based chain’s leadership team. It said it would continue Rona’s local and ethical procurement strategy and “potentially expand relationships both Lowe’s and Rona have developed with Canadian manufacturers and suppliers.”

Bruce Winder, partner at Retail Advisors Network, said the deal looks good on the surface for both companies, noting that the Canadian do-it-yourself market is not big enough in the long term for three players – Home Depot, Lowe’s and Rona.

He said a major effort will be needed in moving the Lowe’s Canadian head office to Quebec, with the culture difference between the U.S. and Quebec companies. “Don’t underestimate time and disruption in operations before they get their A game on collectively,” he said.

However, Mr. Winder also noted that Lowe’s decision to hire Mr. Prud’homme to head its Canadian division a few years ago will help smooth the transition to some degree.

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