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Instant Analysis: Lowe's Companies Inc. to Buy Canadian Peer RONA

By Eric Volkman - Feb 5, 2016 at 1:00PM

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The U.S. home improvement retailer will pay over $2 billion for its Quebec-based competitor.

What happened?
The second time, apparently, is the charm. Home improvement chain Lowe's (LOW 2.12%) announced that it has reached an agreement with RONA to acquire the Canadian company in an all-cash deal worth C$3.2 billion ($2.3 billion).

Lowe's made an initial attempt to buy RONA in 2012 for the equivalent of roughly $1.75 billion, only to be turned down. This time, said RONA chairman Robert Chevrier in the companies' joint press release, "Lowe's has presented us with an excellent plan that enables our company to maintain its brand power while at the same time leveraging Lowe's global presence to build upon and expand our reach."

Lowe's expects the purchase to close in the second half of 2016 and to be accretive to earnings the year after closing. The sale is subject to approval from Canada's Competition Bureau.

Does it matter?
Due to its proximity and the many cultural similarities with the U.S., Canada is a tempting market for American retailers. But if recent experiences are anything to go by, it's a tougher market to crack than it appears.

One recent high-profile flop north of the border was Target (TGT 1.70%), which set up shop there in 2011 and within a few years had over 120 stores in place. But Target grew too fast for its own good in the region, before it properly understood the market. Among other difficulties, it had trouble attracting customers, and the resulting drag on its operations led to a steep overall loss of more than $1.6 billion in fiscal 2014. Target shuttered its Canadian stores last year.

At least Lowe's is snapping up an existing operation and one that's well established. RONA has a network of nearly 500 outlets throughout the country, most of which are located in the Francophone province of Quebec. Also, Lowe's has had its own presence in Canada with a modest network of stores mostly located in Quebec's neighboring province of Ontario (home to Toronto and the nation's capital, Ottawa). So the company has in-country experience and a footprint that compliments that of its asset-to-be.

But Lowe's has already made numerous concessions in order to win over RONA's key shareholders, promises that cover maintaining job levels and operations in Canada. These could be quite limiting. Although the Quebec-based company is a big asset that is highly complementary on paper, integration might be trickier than the new owner has anticipated. We'll see how effectively Lowe's can hammer the two entities together as the year rolls on.

Eric Volkman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
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Target Corporation Stock Quote
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TGT
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