Rona’s preferred price for prefs

We now know what some issuers will do to save themselves $6.9 million.

And it ain’t pretty. And what’s more it doesn’t set a good precedent for the capital markets: Not for the companies who raise capital there, not for the thousands of market participants who earn their living there and not for investors trying to make a decent living.

This week material for the upcoming meeting of preferred shareholders of Rona Inc. was mailed out. At that meeting holders will be asked to support a $24 a share offer from the company. Five years back investors paid $25 a share. Rona sold 6.9 million shares.

The offer is being done by way of a plan of arrangement and it took the company, its lawyers, and its financial advisers 94 pages to dress up/explain the transaction. This is the same Rona — a company acquired by Lowe’s earlier this year in a deal in which common shareholders received a premium — deemed vital to the economic interests of Quebec in 2012 when Lowe’s made its first bid at $14.50 a share.

In the face of such opposition back then and with the Caisse de depot buying more shares, Lowe’s (which posted US$59.07 billion of net revenues and US$2.55 billion of net income in 2016) retreated. It returned this year with a $24 offer for the common that was roundly greeted by all parties.

All except the preferred shareholders who were offered $20 a share, an offer they soundly rejected.

That offer was supported by a seven-page fairness opinion from Scotia Bank, which used four approaches to “value considerations:” precedent transactions, precedent premia, comparable company trading and discounted cash flow.

The latter was noteworthy because in arriving at RONA’s equity value, it started with the company’s enterprise value and deducted projected net debt and minority interest “as well as the preferred share value,” which was presumably at $25 a share. That approach also established the hierarchy of the capital structure.

But in preparing its fairness opinion for the preferreds, the $25 a share seemed to be forgotten as Scotia focused on the premium holders would receive, and on how (the prefs) would trade after being “reset and credit re-rating.”

Rona has now returned with a $24 a share offer for the preferreds. RBC Capital Markets provided a fairness opinion based on a market test. RBC relied “upon a comparison of the implied yields” of the prefs at “the proposed $24 per share offer price compared to current yields on other preferred shares with similar credit ratings.”

What’s upset some market professionals is that “a potentially dangerous precedent” is being set. One such professional argues according to his reading of the prospectus, the preferreds rank senior to the common shares and “may be redeemed by the company at par or are entitled to receive par before any payment to common shares in the event of liquidation, dissolution or wind-up.”

In the prospectus this was said. “In the event of the liquidation, dissolution or winding-up of the Company, each holder of Preferred Shares will be entitled to receive, according to the holders’ priority of rank, an amount equal to the price at which such shares were issued.”

In his view what’s going on here is a wind-up. A call to Tiffany Mason, senior vice-president of corporate finance at Lowe’s, asking why the offer is fair and why is it a positive development for the capital markets was not returned.