November 17, 2012
Mr. Irwin A. Michael
President and CEO
I.A. MICHAEL INVESTMENT COUNSEL LTD.
8 King Street East, Suite 700
Toronto, Ontario M5C 1B5
CANADA
Mr. Michael:
I am writing as a Rona Inc. (minority) shareholder.
It is reported that Lowes Inc. and Rona Inc. held discussions about the possible sale of Rona in 2011.
As nothing emerged from these discussions, Lowes has submitted an offer to buy Rona for a cash consideration of $14.50/share in July 2012.
Rona's Board of directors has rejected the proposal claiming it was inadequate in price and also for a political motive (being the loss of a Quebec economic major asset/flagship).
Rona's Board of directors knew full well that $14.50/share was a better price than Rona's average performance stock price (prior to Lowes offer) of the past few years and that $14.50/share was not a final price offer. If Rona's Board of directors would have acted in good faith and work on behalf of all its shareholders, it could have brought Lowes to increase its price for instance to $16.00/share.
Rona's majority shareholder "The Caisse de dépôt et placement du Québec", rushed, by political interference from the then Quebec Liberal government, to buy more Rona shares at approximately $14.00 on the same day that Rona made public the Lowes offer, a moves that makes no sense. The CDPQ bought further Rona shares thinking it would prevent Lowes of acquiring Rona, which is foolish, as obviously when Lowes noticed that it couldn't be tendered enough shares to buy Rona, it simply had to withdrew its offer and consequently trigger Rona share price to drop, which outcome indeed happened. Lowes could have technically increased the price of its offer but given Rona's Board of directors refusal to consider the sale of Rona, Lowes made the right thing, strategically talking, by withdrawing its offer. The CDPQ has behaved like a "laughing-stock" by displaying petty politics to its disadvantage. Another disturbing fact is that the CDPQ is said to have ousted Rona Inc. ex-President/CEO, Mr. Robert Dutton, by instructing Rona's Board of directors to do so, especially following the recent release of poor financial results. It appears that Mr. Dutton was open to study the Lowes offer but that overall, Rona's Board of directors was against it.
This being said, if Lowes is still interested in buying Rona, it must set-up a teleconference call with The Caisse de dépôt et placement du Québec (holding 15% of Rona shares) to ensure what is the CDPQ business plan about Rona? Is the CDPQ willing to accept $14.50/share? If not, at what price would it tender its shares to Lowes? Does the CDPQ wish to wait six, twelve, eighteen months, etc... to see if Rona improves itself? What course of action does the CDPQ intends to follow about Rona, must be cleared up?
Caisse de dépôt et placement du Québec
1000, place Jean-Paul-Riopelle
Montréal, Québec
Canada
H2Z 2B3
Telephone: 514 842-3261
Fax: 514 842-4833
Toll free: 1 866 330-3936
________________________________________________________________________________________________________________
If the CDPQ gives its approval to an immediate sale of Rona, along with the backing of other institutional investors such as:
Invesco Canada 10,2% (14-11-12)
Fonds de la FTQ 3,5 % (n.d.)
IA Michael Investments 3% (30-06-12)
Dimensional Fund Advisors 2,9% (31-07-12)
Lowes would have approximately 35% of Rona shares. Lowes, according to securities regulations, would therefore need an approximate extra 32% of shares to be tendered in order to win Rona. This portion would likely come from retail investors. As for merchants who have already made known of their opposition to the Lowes offer, it remains to be seen if some would change their mind in light or Rona's recent poor financial results (or) if a sweetened offer from Lowes arise?
The bottom line of all this "way-out-of-proportion emotional case" is that Rona Inc. is a public company, therefore owned by sharehodlers. It is shareholders and shareholders alone who can ultimately decide upon what fate they want their company to be going forward.
As long as Lowes Inc. or any other suitor committs itself in formal writing to:
- KEEP Rona Inc. headquartered in the province of Quebec permanently
- CONTINUE to buy from Quebec/Canadian suppliers to stock Rona stores permanently
there is no reason why the sale of Rona should be unachievable.
I would like to point out that shareholder Invesco Canada Ltd.'s approach to remove Rona's Board of directors entirely is not a proper initiative in current circumstances, although Rona's Board of directors has rejected the initial Lowes offer.
These directors have fiduciary duties, namely to protect and favour any situation that benefit all shareholders.
Given that Rona is at search for a replacing President/CEO, it does not warrant "to add fuel to the fire" at this point, in my view.
If a majority of Rona shareholders support any proposal for their company, the Board of directors has no choice but to endorse it, failing which, they could become liable to legal actions.
Rona's hope for a recovery is by all means not to take place in the short term, given the industry it operates in, which is somewhat cyclical and more competitive nowadays.
It must be noted that no other suitor than Lowes Inc. has yet submitted a proposal to buy Rona Inc.
These facts must be carefully assessed in order to determine whether Rona Inc. is better off being sold in a near future at a satisfactory price or with the optic of waiting two or three years, betting that a turnaround will occur.
Given Rona's track-record of the past few years, it appears that Rona shareholders would be safer to give nod to a buyout offer at this stage.
Luc Proulx