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Lowe’s $2.3 Billion Rona Acquisition: A Fair Price for Growth?

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Lowe’s (LOW) announces an agreement to purchase Rona

On February 3, the world’s second-largest home improvement retail chain, Lowe’s (LOW), announced that it had entered into a definitive agreement to acquire Canada’s largest home improvement retailer, Rona (RON.TO), for $2.3 billion ($3.2 billion Canadian) in an all-cash deal. Lowe’s will purchase all Rona’s outstanding and issued common shares for $24 Canadian. It will pay $20 Canadian for all issued and outstanding preferred Rona shares. The offer represents a premium of 104% to Rona’s closing stock price on February 2. The offer price of $24 Canadian is also 38% higher than Rona’s 52-week high price of $17.36 Canadian.

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The Rona acquisition has received unanimous approval from the Board of Directors of both companies. It’s expected to close in calendar 2H16, subject to Rona shareholder approval and the fulfillment of other regulatory conditions. Rona’s board of directors plans to recommend the offer to shareholders. According to a Scotia Capital (BNS) report to the Rona board, the financial terms of the offer are fair.

2012 bid foiled

This is Lowe’s second attempt to buy the Canada-based home improvement retail chain. Back in September 2012, the US-based (VOO) Lowe’s withdrew its proposal to purchase Rona at $14.50 Canadian per common share. At the time, Lowe’s withdrew the bid because Rona’s board wasn’t in favor of the deal.

Stock market reaction

Following the acquisition announcement, Lowe’s stock slumped 6.2% to $67.42 on concerns that the price was too high. Rona’s shares jumped 98% to close at $23.30 Canadian, approaching the offer price of $24 Canadian.

The world’s number-one home improvement retailer, Home Depot (HD), has ~181 stores in Canada.[1. As of November 1, 2015] Its stock fell 1.2% to $123.79 on February 3. Pier 1 Imports (PIR) operates 81 stores in Canada as of the end of fiscal 2015. Its stock rose 0.2%. The Lowe’s–Rona deal could alter the competitive landscape significantly, as you’ll read in the next part of this series.

HD and LOW together constitute 10.1% of the holdings in the Consumer Discretionary Select Sector SPDR Fund (XLY) and 8.1% of the portfolio holdings in the iShares U.S. Home Construction ETF (ITB). XLY provides exposure to over 80 US firms in the consumer discretionary sector.

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