Pressure mounts on Lowe’s to up its offer for Rona’s preferred shareholders

The battle for that support of Rona’s preferred shareholders – who in the takeover by Lowe’s are now being offered $20 per share, a $5 discount towards the original cost – is set to get a a bit more interesting three weeks prior to parties gather in Montreal to approve the transaction.

This week, and perhaps as soon as Thursday, more details is anticipated to be sold about the extent from the opposition to the terms provided to the pref shareholders. “We have had lots of emails and calls from retail investors about the situation and we’ll be responding,” said an adviser with knowledge of what’s being planned.

And there’s a lot at stake. For investors who paid $25 and bought 6.9 million of the Series 6 preferred shares in February 2011, the capital loss is $34.5 million. Under normal circumstances, those five-year rate reset prefs would be up for renewal at the end of this month. There’s two options: either the issuer would redeem them and holders would get $25 or the issuer would extend them and provide a brand new floating rate pref. (There was no choice to offer another 5 year fixed interest rate pref.) The yield on the new prefs could be set at a spread of 265 basis points above the T-bill rate.

For the customer, the risk is the fact that one area of the transaction might not be met. To be effective, Lowe’s requires that holders of two-thirds of the prefs sign off. In the event that condition isn’t met presumably the prefs will remain outstanding – meaning reporting issuer obligations for Lowe’s.

This week The Stirling Funds, a London-based valued-oriented investment firm (having a strong Canadian connection) that’s being advised by Swedish-based ?stV?st Advisory, fired the first salvo.

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Stirling, a “significant holder” of Rona prefs, termed the $20 bid “to be opportunistic as well as an egregious attempt by them to circumvent the proper takeover provisions of the preferred shares.”

Stirling – that is run by Gordon Flatt, whose brother Bruce is leader at Brookfield – added its intention to search out other preferred shareholders “to garner adequate remedies for those shareholders.”

Flatt said it’s “unfortunate” that Lowe’s “has chosen to short-change the retail investor, many of whom are based in Quebec.”

Flatt issued a wide open letter to Lowe’s. He argued it had been oppressive for prefs, a higher-ranking financial instrument than common shares (that are on offer reasonably limited to tender) not to be worth no less than face or par value.

He asserted Rona’s directors “have failed within their fiduciary duty to preferred shareholders,” who for some reason deemed the transaction fair to the preferred holders.

Maybe the circumstances will vary but there is a precedent that does not look too great for Lowe’s. At the begining of 1987, Australia’s Fosters Brewing acquired Carling O’Keefe. For whatever reason, it decided not to acquire the preferred shares that had been issued by Carling. Led with a brewery analyst Mike Palmer with heavy lifting from Sheila Block of Torys, an action was brought based on improper treatment of Carling’s preferred-shareholders. Over time the courts in Ontario found the conduct of the directors from the amalgamated corporation to be “oppressive” to the preference shareholders. Next ruling the pref shareholders got their proper reward.

bcritchley@nationalpost.com