The battle for the support of Rona’s preferred shareholders – who in the takeover by Lowe’s are being offered $20 per share, a $5 discount towards the original purchase price – is set to obtain a a bit more interesting 3 weeks before all parties gather in Montreal to approve the transaction.
This week, and perhaps as early as Thursday, more details is anticipated to be released concerning the extent from the opposition to the terms provided to the pref shareholders. “We have had plenty 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 from the Series 6 preferred shares in February 2011, the main city 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 rate pref.) The yield around the new prefs could be set in a spread of 265 basis points above the T-bill rate.
For the buyer, the risk is the fact that one part of the transaction might not be met. To be effective, Lowe’s mandates that holders of two-thirds from the prefs sign off. If that condition isn’t met presumably the prefs will stay outstanding – meaning reporting issuer obligations for Lowe’s.
This week The Stirling Funds, a London-based valued-oriented investment firm (with a strong Canadian connection) that’s being advised by Swedish-based ?stV?st Advisory, fired the very first salvo.
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Stirling, a “significant holder” of Rona prefs, termed the $20 bid “to be opportunistic and an egregious attempt by them to circumvent the proper takeover provisions of the preferred shares.”
Stirling – which is run by Gordon Flatt, whose brother Bruce is leader at Brookfield – added its intention to seek out other preferred shareholders “to garner adequate remedies for all shareholders.”
Flatt said it’s “unfortunate” that Lowe’s “has chosen to short-change the retail investor, many of whom are located in Quebec.”
Flatt issued an open letter to Lowe’s. He argued it had been oppressive for prefs, a higher-ranking financial instrument than common shares (which are being offered a premium to tender) not to be worth a minimum of face or par value.
He asserted Rona’s directors “have failed within their fiduciary duty to preferred shareholders,” who for whatever reason deemed the transaction fair towards the preferred holders.
Maybe situations will vary but there’s a precedent that doesn’t look too great for Lowe’s. At the begining of 1987, Australia’s Fosters Brewing acquired Carling O’Keefe. For whatever reason, it didn’t acquire the preferred shares that had been from Carling. Led with a brewery analyst Mike Palmer and with heavy-lifting from Sheila Block of Torys, an action was brought based on improper management of Carling’s preferred-shareholders. Over time the courts in Ontario found the conduct of the directors of the amalgamated corporation to be “oppressive” towards the preference shareholders. Next ruling the pref shareholders got their proper reward.
bcritchley@nationalpost.com
