The not-so-pleasant choices faced by RONA’s preferred shareholders

Shareholders of RONA gather in Montreal Thursday to vote on the $3.2 billion takeover by Lowe’s.

For common shareholders, the problem seems a no-brainer. There isn’t any real alternative to tendering to the $24 a share offer, a cost that represents a proper premium to the shares’ recent trading price. And the prices are almost $10 higher than the sale the same buyer made about three . 5 years back.

For preferred shareholders – and RONA has 6.9 million outstanding for any face worth of $172.5 million – the situation would also seem clear: tendering isn’t an option given they are on offer $20 a share, or a $5 a share haircut to the original cost.

According to some holders, receiving that low price would set a poor precedent given that there’s a slew of rate-reset prefs which are trading in a substantial discount to their purchase price. If one issuer gets away with such a deal, others follows suit.

Related

Rona Inc tops estimates in potentially last report as Canadian-controlled retailerLowe’s Cos to buy Canada’s Rona for $3.2 billion in cash to produce do it yourself giant

Accordingly, it’s not within the interests of pref share holders, who set up $25 when the issue came to market within the expectation they’d get $25 of value once the time rolled around for the rates to become reset, to inspire such behaviour. So Lowe’s bid $20 C which represented reasonably limited to the recent trading price but an overall total acquisition savings of $34.5 million C knowing that if it’s rejected it will be required to remain a reporting issuer.



James Hymas, of Hymas Investment Management, includes a different take, arguing RONA pref shareholders could tender and redeploy the proceeds in other rate reset prefs that generate comparable income.

Hymas, who does not own RONA preferreds  either personally or with the funds he manages, argues when the $20 a share offer is turned down, the cost of the RONA prefs will fall below $20. In other words: result in the trade.

On Monday, RONA reported the results from the conversion options taken by pref shareholders: holders of about sixty-six per cent of these opted for the floating rate option with the rest choosing the fixed rate pref that will see them receiving 3.324% a year for the following five years.

For RONA’s pref shareholders, it’s been rather traumatic since the acquisition was announced in early February. After dealing with the shock of the $20 a share offer, they’ve had to endure two plenty of comments produced by London-based The Stirling Funds. But there has been no public follow-up, an instance of over-promising and under-delivering. (Maybe it’s keeping its powder dry until Thursday.)

One month back, it said Lowe’s bid was “opportunistic as well as an egregious attempt by these to circumvent the proper takeover provisions from the preferred shares,” and said it would “seek out other preferred shareholders to garner adequate remedies for all shareholders.” It followed those statements with an “open letter” to Lowe’s and termed the $20 a share bid “oppressive.”

Numerous attempts happen to be made to reach Stirling and it is Swedish-based advisor ?stV?st Advisory to find out its next steps. The first call elicited the response it had received numerous responses from holders. Since then nothing.

But there may be another twist considering that by the end of 2015, Fidelity Investments owned more than 10 per cent from the issue – a lot more than three times what it really owned at the end of the first quarter of 2015. We couldn’t reach Fidelity for a comment.

bcritchley@nationalpost.com