Housing

Analyst Cautions Lowe's on Chasing the Buyout of Rona

Lowe’s Companies Inc. (NYSE: LOW) is making a mistake in its recently announced acquisition of the Canadian home improvement chain called Rona. At least that is the take of the analyst team at Janney Capital Markets, which carries only a Neutral rating and a price target of $26.00 per share for Lowe’s. Today’s news coincides with Rona’s rejection of the buyout from Lowe’s.

The report said that this buyout is at 23% to the July 30 close and a 36% premium to the share price at the time of the offer, but it is also 9.2x multiple on trailing 12-month EBITDA.

The Janney team noted:

We believe this could have an adverse impact on LOW shares and multiple, as capital allocation had become a key investment theme for the shares. This deal would prove dilutive to returns, and would be a somewhat complicated integration in our opinion. The different size stores, and the complex operating model i.e. retail, franchise and wholesale distribution model, could complicate this transaction. Additionally, it is easy to argue that Canada’s housing market has some parallels to the US housing market in 2006.

Another concern goes back about 14 years, all the back in 1998. Janney’s team said that when Lowe’s bought Eagle Hardware, the integration proved to be challenging and it diluted returns due to management differences and a change in store sizes. Quebec Finance Minister Raymond Bachand already has said that the province may take steps to prevent a takeover by Lowe’s.

Here is some food for thought: Rona was just upgraded to Buy from Hold at Desjardins in Canada this morning after having rejected the offer from Lowes’s.

Maybe Wall St. is happy that Rona rejected the deal too. Lowe’s shares were up 2% at $25.89 in early trading.

JON C. OGG

 

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