Lowe's offers $3.2B to take over Canadian rival Rona

U.S. home improvement chain Lowe's is buying Canadian rival Rona in a friendly takeover valued at $3.2 billion Cdn.

The boards of both companies unanimously approved the transaction, they said in a news release early Wednesday.

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The deal would give the U.S. chain more of a foothold in Canada's competitive home improvement and renovation retail market, especially in Quebec, where Rona dominates the market.

More about the companies:

• Lowe's is based in Mooresville, N.C.,and hasmore than 1,800storesand 265,000 employeesin the U.S.,Mexico and Canada but none in Quebec.
• Rona, with its headquarters in Boucherville, Que., hasapproximately 500corporate and independent affiliate dealer storesand ninehardware and construction material distribution centres. The company hasmore than 17,000employees in corporate stores and over5,000 employees in the stores of itsindependent affiliate dealers.

A previous attempt by Lowe's to purchase Rona in 2012 collapsedafter coolness from Rona's management and outright hostility from the Quebec government and pension fund as well as dozens of independent merchants who operate Rona stores.

Lowe's has agreed its Canadian headquarters will bein Boucherville,and said it will maintain Rona's multiple retail store banners.Mark Satov, business advisor andfounder of Satov Consultants, says he suspects the plan long term will be to continue to operate Rona in Quebec, but convert stores in the rest of the country to Lowe's.

"The Rona brand is very strong in Quebec and an also-ran everywhere else," he said in an interview.

Lowe's has also committed "to continue to employ the vast majority of its current employees and maintain key executives from Rona's strong leadership team," the release said.

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Lowe's is offering $24 per share in cash about double what the stock was worth at the end of trading on Tuesday before the announcement Wednesday.

But the recent slide of the loonie is at play behind the scenes.

Today, the loonie is worth about 71cents US, which means thisoffer of $24 Cdn per share for Rona only costs Lowe's just over $17 US in the currency in which it operates. However, the buyer gets to credibly say it's offering double what the market says Ronais worth.

Put another way, Wednesday's offer for Rona is more than 60 per cent higher than the one in 2012, but in U.S. dollars, it's only about 17 per cent higher.

Rona shares soared 98 per cent Wednesday on the strength of the Lowe's offer, closing at $23.30.

What it'll take to nail down the deal

The deal still faces numerous hurdles on the road to approval.

Regulators in Canada and the U.S., including the Competition Bureau, will have to give their OK for the deal to be finalized.BMO Capital Markets analyst Peter Sklar said the deal would likely win regulatory approval.

And Rona'sbiggest shareholder is Quebec's pension plan, the Caisse, which owns almost one fifth of the company. In a release, the pension plan gave its OK to the offer and said it will tender its 18 millionshares, saying it"believes the transaction will result in equal or superior economic activity generated by the Rona banners in Qubec."

But even if it gets approved by the various regulatory bodies and shareholders, the new company has to undergo major changes to succeed as a merged company, retail consultant Bruce Winder said.

There are "culturaldifferences between a big U.S. chain and a Quebec company," he said."Don't underestimate time and disruption in operations before they get their 'A' game on collectively."

Winder addedthat Lowe's Canada currently has a French-Canadian CEO,Sylvain Prud'homme, something which should help ease the cultural transition "to some degree."

As part of the deal,Prud'homme will stay on to head Lowe's entire Canadian division, including Rona, Lowe's said in a release.

Satov says he thinks consumers stand to benefit from the tie-up. "For sure the consumer wins," he said."They need to grow to make this deal pay and they'll grow byfighting to keep consumers, and contractors happy."