TORONTO, Aug 2 (Reuters) - A proposal by Lowe's Cos Inc
, the world's No. 2 home improvement chain, to buy Canada's Rona Inc for C$1.8 billion ($1.8 billion) has come at an inopportune moment.
The offer, rejected by the do-it-yourself retailer, is raising hackles in Rona's home province of Quebec, where the ruling Liberals face a tough challenge from the pro-independence Parti Quebecois in an election campaign that began this week.
Both parties have come out against the proposal. Half of Rona's 30,000 employees are based in French-speaking Quebec, and the Liberal finance minister, Raymond Bachand, says a sale would not be in the best interests of either Quebec or Canada.
'It strikes me on first blush as really bad planning on the part of Lowe's. If there is one thing we've learned, it is never try and get Investment Canada approval during an election. They couldn't have planned this worse,' said one Canadian lawyer, who specializes in competition law and regulatory reviews.
The Investment Canada Act requires Ottawa to review foreign investments worth more than C$330 million and gives it the power to block a deal that is not in the country's best interests.
That has happened only twice, most recently in 2010, just months ahead of federal elections, when the government foiled BHP Billiton's C$39 billion hostile bid for fertilizer maker Potash Corp. Strong opposition from Potash Corp's home province of Saskatchewan was a big factor in that decision.
The lawyer, who is not involved in the deal but who asked to go unnamed to protect business relationships, said an acrimonious history between Canada and Quebec complicates matters for Ottawa.
'The way Canada is set up, great deference is paid to Quebec and Quebec's interests. If the province really wants to put its foot down and reject this deal, Ottawa is going to be very, very hesitant to go against the wishes of Quebec, because it would just create an uproar,' he said.
HAPPY TO TALK
Lowe's said it is happy to discuss any of Quebec's concerns.
'In due time, we look forward to the opportunity to meet with the government to address any questions or concerns they may have,' Lowe's spokeswoman Chris Ahearn said by email.
Lowe's on Thursday launched a website outlining its proposal (www.lowes.ca/ronaproposal). The site encourages Rona's dealers to get in touch, but it is only available in English, an unusual choice for a province where the use of the French language is a sensitive and politicized issue.
Rona shares rose as high as C$14.49 on Tuesday after Lowe's C$14.50-a-share proposal was made public, but shares pared gains as investors lowered expectations in the face of Quebec's objections. The shares were at C$13.91 at noon on Thursday.
Norman Levine, a fund manager whose firm sold roughly half its stake in Rona after news of the bid emerged on Tuesday, said it was 'pretty naive' of Lowe's and its management team to not see that the bid would become a political issue.
Levine, the managing director of Portfolio Management Corp, sees chances of Lowe's succeeding at about 50-50, but he warns that Rona's shares could easily sink back to around C$10 a share if the odds of a deal fade away.
'I think that the Quebec government is way overplaying their hand,' he said. 'These are stores, they're not nuclear reactors. They (Lowe's) are not up and taking them out of the province.'
Provincial views are not a determining factor in foreign takeovers, but most competition lawyers agree that federal officials reviewing the deal would be loathe to ignore Quebec's views on the subject.
'I think this is purely political posturing in Quebec,' said another competition law expert, who also asked not to be named for similar reasons. 'But it is important posturing nonetheless, when you have an election and you have an opposition party that would be all over the government if they were supportive of the Lowe's move or not complaining about it.'
To be sure, political objections could become moot, if Lowe's bumps up its offer and Rona accepts a higher price.
Rona operates nearly 800 stores across Canada, including 316 in Quebec. Lowe's has 31 in Canada, none of them in Quebec.
Most U.S. retailers launch their Canadian operations within English-speaking Canada, given the challenges of operating in Quebec, which has a distinct culture. U.S. brands are also less well-known in Quebec than elsewhere in Canada.
Even Canadian companies from outside Quebec have faced obstacles.
A decade ago, the Caisse de depot et placement du Quebec - Rona's largest shareholder - blocked Rogers Communications Inc's friendly bid for Quebec-based cable company Videotron and backed a hostile bid from Montreal's Quebecor Inc instead.
Caisse, which has a dual mandate of managing the Quebec pension plan and contributing to economic development, said on Tuesday it had boosted its stake in Rona to 14.2 percent, from about 12 percent.
It promised to examine the impact of Lowe's proposal on its own returns, on Rona's suppliers and on the Quebec economy.
Lowe's has promised to keep Rona's headquarters in Quebec after a deal and it expects the number of people Rona employs in Quebec and the rest of Canada to rise or stay the same.
But the promises may not be enough to appease critics, who have seen thousands lose their jobs after big takeovers.
The United Food and Commercial Workers union, which represents nearly 3,000 R ona workers in Quebec, said it was concerned by the Lowe's proposal and the U.S. retailer's failure to engage with the union so far.
'I have to admit we are a little worried,' said Antonio Filato, president of Local 500, which represents some of the Rona workers in Quebec.
Filato said the union would be open to talks with Lowe's if a deal gets done, but Lowe's must be ready to deal with unions and to realize that operating in Quebec is different.
'If they think it's going to be like being in the States, it won't be like that in Quebec.'
($1 = $1.00 Canadian)
(Additional reporting by Dhanya Skariachan and Randall Palmer; Editing by Janet Guttsman and Frank McGurty) Keywords: RONA LOWES/
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