Lowe’s lowballs investors again

If the preferred shareholders at RONA were looking for a reason to shop elsewhere for their hardware needs, the company’s new parent, the giant U. S. home hardware retailer Lowe’s Companies Inc., has just given them a good one.

Lowe’s, which acquired all of RONA’s common shares earlier this year for a reasonable price but which declined to do the same for the company’s preferred shareholders, has returned.

This time round, the two have offered $ 24 a share to the holders of its Series 6 Class A fixed- rate preferred shares and its Series 7 floating- rate pref shares. Earlier this year, the offer to the holders of its then Class 5 fixed rate prefs was $ 20 a share. Less than five years earlier, investors paid $ 25 for each pref share, a haul of $172.5 million for RONA, for which it paid an annual dividend of 5.25 per cent.

But the pref shareholders turned down the $ 20- ashare offer at a vote held less than eight weeks later. The rejection was fairly hefty, with about three quarters of those who voted nixing the offer.

At the time, the plans by Lowe’s and Rona attracted plenty of criticism. One large shareholder, The Stirling Funds, termed the $ 20- a- share offer “opportunistic and an egregious attempt by them to circumvent the proper takeover provisions of the preferred shares.” The investment firm added it was “unfortunate” that Lowe’s “has chosen to shortchange the retail investor, many of whom are based in Quebec.”

For good measure, Stirling added it was oppressive for prefs, a higher- ranking financial instrument than common shares (which were being offered a premium to tender) not to be worth a minimum of face or par value. A $ 25- a- share offer at the time would have cost an extra $ 34.5 million — or about one per cent of the transaction’s value — and brought to an end its reporting requirements.

The offer from Lowe’s and RONA was supported by an opinion by Scotia Capital stating “the preferred share consideration under the arrangement was fair from a financial point of view to the preferred shareholders.” But that fairness opinion didn’t hold much sway with holders.

Holders were busy with another matter. Because the initial five- year reset period occurred just prior to the vote on the takeover by Lowe’s, holders had to decide whether they would accept a new fixed- rate pref ( that paid 3.324 per cent for the ensuing five years) or a new floating- rate pref ( that paid 3.11 per cent for the initial three months).

Now Lowe’s is back. This time the offer is $24 a share. That offer is backed by a fairness opinion, this time, RBC Capital Markets. The offer also has the support of Fidelity Investments Canada ULC, which “owns a significant portion of the preferred shares.”

Here’s one way to put Lowe’s actions to its preferred shareholders i nto perspective: If it offered face value of $25 per pref, the extra $ 1 per share would cost $6.9 million.

When it announced its acquisition of RONA, Lowe’s said it had “identified over $ 1 billion” of opportunities to further increase revenue and operating profitability in Canada. “Eliminating RONA’s public company costs” was one way profitability would be improved. In fact, Lowe’s said there is “potential to double operating profitability in Canada over five years.”

A message sent to Lowe’s was not returned. Investors liked the news. In trading Tuesday the prefs closed at $23.95.