Lowe’s bid undervalues Rona’s preferred shares: Stirling Funds

U.K. investment firm The Stirling Funds has released an open letter contending that the proposed $3.2 billion buy of Canadian home improvement retailer Rona Inc (TSX: RON) by Lowe’s Cos Inc (NYSE: LOW) undervalues the preferred shares of the former. The investor has retained ÖstVäst Advisory to seek “fair remedies” for Rona’s preferred shareholders. Boucherville, Québec-based Rona’s largest investor, the Caisse de dépôt et placement du Québec, has said it would accept Lowe’s offer.


Open Letter to Lowes (LOW: NYSE) and to Rona (RON: TSX) – Lowes Bid Undervalues Rona Preferred Shares (RON.PR.A: TSX)

Takes Care of Everyone Except Rona Preferred Shareholders

LONDON, March 7, 2016 /CNW/ – Lowes, a FORTUNE 50 US based multinational company with sales of over $56 billion, has come to Canada to TAKEOVER, TAKE PRIVATE, CHANGE CONTROL of Rona Inc. Why are these descriptions important? Because they mean that certain things happen: common shareholders get a “Take-Over” premium for their shares and directors and officers get paid handsomely (> $40 million) by accelerating payments that would otherwise take many years for them to receive, if at all.

Let’s consider fundamental principles of Canadian and Quebec corporate law. If Rona’s common shares are collectively worth $2.6 billion, than any higher ranking financial instrument is worth at minimum its face or par value. But that is not how the transaction has been structured and as a result retail preferred shareholders will be FORCED to accept $5 per share less than its face or par value of $25. This is OPPRESSIVE.

Moreover, the Rona Board of Directors owe a fiduciary duty of care to all stakeholders. They have addressed the common shareholders’ interests with a > 100% premium, debenture holders which stand to gain better ratings for their interests, and employees by undertaking to maintain employment, but they have failed in their fiduciary duty to preferred shareholders.

In a similar situation in Canada, RioCan REIT preferred shares with almost identical terms as the Rona preferred shares and also with a March 31, 2016 maturity are being redeemed at their par value of $25.

The Caisse de dépôt et placement du Québec, one of Canada’s pre-eminent pension fund managers, supports the deal seemingly knowing that the preferred shares are held principally by Quebec retail investors and Quebec pensioners, the very people the Caisse represents.

Recently, a Quebec-based retail investor who owns Rona preferred shares wrote to the company:

“I feel the Rona board in unanimously recommending the Lowes take-over has failed to act fairly and equitably in the interests of all stake holders and has only acted in the interest of common shareholders”… “Do not short change the small retail investor”.

As background, the Stirling Funds owns Rona preferred shares. We also own Lowes common shares and are supportive of Lowes’ strategic entry into Canada, and its takeover offer of Rona. We believe Lowes has 1) a strong, focused and highly competent management team; 2) are well positioned in their market segments; and 3) will prosper significantly as the economy continues to recover and the housing and renovation cycle normalises. We are not hostile to Lowes (in fact the opposite). Our issue lies in the deal structure. It would seem bad business for Lowes to “short-change” the very group of investors it hopes to win as customers to save a rounding error on a $2.7 billion purchase.


To further support our efforts to seek fair remedies for the Rona preferred shareholders, the Stirling Funds has retained European-based ÖstVäst Advisory, a specialist advisor to global institutions in complex financial and security law matters.

“It is unclear why Lowes would uniquely diminish the value of the Rona preferred shareholders, while handsomely rewarding everyone else” stated Fredrik Skoglund, Partner & Head of Research of ÖstVäst Advisors. “I would assume the Quebec Securities Commission would not wish to establish precedents like this”.


The Stirling Funds are value-focused investment funds based in London, England that hold a portfolio of diversified global securities principally in asset-rich companies trading at a discount to their underlying intrinsic value.

ÖstVäst Advisory, based in Stockholm Sweden is an independent, specialist global advisory firm providing client tailored financial, investment and corporate services.

For further information: ÖstVäst Advisory AB, Stockholm, Sweden, Fredrik Skoglund, Partner / Head of Research, +46 70 410 5165, info@ostvast.com; The Stirling Funds, London, England, Gordon Flatt, Chief Investment Officer, +44 3239 9932, info@stirling-funds.co.uk

Photo courtesy of Rona Inc