Rona shareholder hope CEO departure will prompt talks with Lowe's

Rona president and CEO Robert Dutton arrives at the company's annual meeting Tuesday, May 10, 2011, in Montreal. (THE CANADIAN PRESS/Paul Chiasson)

MONTREAL -- One of Rona's largest shareholders says the home-improvement retailer's board should launch discussions with U.S. rival Lowe's following the sudden departure of long-time chief executive Robert Dutton.

Irwin Michael, portfolio manager of Toronto-based ABC Funds, said Rona needs to undertake major change in the face of years of poor results and a weak retailing environment.

"One major way might be talking to Lowe's or someone else who might bring on new fresh ideas," Michael said in an interview Friday after Dutton's departure was announced by the company.

"Clearly, retailing has changed dramatically and you've got a tremendous competitor in Home Depot... the best course would be probably to open up discussions with Lowe's."

Michael said he was surprised by Dutton's resignation, since he appeared to be firmly in control of the company he had headed for 20 years.

The Dutton era was a period when Rona grew enormously. It did so by building new big box locations, making acquisitions and partnerships in Canada's fragmented home-improvement industry, and adopting a variety of store formats.

It currently has nearly 30,000 employees and 830 locations under its banner, giving Rona a bigger reach in Canada than Home Depot or Lowe's, the No. 1 and No. 2 home improvement retailers in the United States.

Home Depot has just 180 stores across Canada and Lowe's has about 31 Canadian locations, out of 1,745 across North America.

Lowe's has revealed it approached the Montreal-area company informally late last year and again in the summer, but the quiet talks were blocked when Rona's board announced on July 31 that a deal wasn't in its shareholders best interest.

Quebec politicians quickly announced they were against a foreign takeover of such a major employer. A group representing independent owners that operate under the Rona brand also said the Lowe's business model didn't suit them either.

Michael said he thinks a deal can be sold to politicians if jobs are protected and Canadian manufacturers are able to supply the Lowe's network across North America.

ABC Funds is Rona's fourth-largest investor with 3.6 million shares or three per cent of the company, according to Thomson Reuters. He said Rona has a good franchise and "if one cobbles together a Lowe's with a Rona" the result would be more than the two separate companies.

Rona's largest shareholder, the Caisse de depot, wouldn't say if it pushed Dutton to leave or whether it believes the company should launch talks with Lowe's.

"What's important for us is that Rona looks to the future and focus all its energies on improving performance," said spokesman Maxime Chagnon.

Derek Dley of Canaccord Genuity said the decision to spurn Lowe's was a board decision and nothing has really changed even with the departure of Dutton.

"Investors were looking for change and they've got that today and that's why the stock is up," he said from Vancouver..

"But at the end of the day there's still a lot of headwinds facing this company in terms of the overall macroeconomic environment and the challenging home renovation market and I don't really see anything to improve the company's top line in the near term."

Dley said Lowe's shareholders weren't pleased when the company announced an interest in buying Rona and would prefer that it focus on improving the performance of its U.S. stores.

He said many Rona investors have been calling for Dutton's departure for quite some time given Rona's poor performance over five years. But he doesn't foresee a turnaround in the company until consumer confidence and discretionary spending increases.

"Until we see a consistent positive trend in same-store sales, I don't really see any catalyst to really turn around the business and see a marked improvement from what we have been seeing for the last couple of years."

Neither Dutton nor board chairman Robert Pare were available for an interview. But Rona spokeswoman Valerie Lamarre said the company will maintain its strategic plans.

"Today's news doesn't change this," Lamarre said in an email.

A spokeswoman for Lowe's says it wouldn't comment on Dutton's resignation or whether it is still interested in acquiring Rona.

"Since we withdrew our proposal, we have had no further conversations with Rona," said Julie Yenichek.

The announcement of Dutton's departure came two days after Rona announced its third-quarter net profit fall nearly 90 per cent due to more competition and one-time costs.

Dutton joined the company, headquartered in Boucherville, Que, in 1977 and became its president and chief executive in 1992, cobbling together the largest network of home-improvement retailers in Canada.

"Robert was a pioneer and has been an inspiration for generations of merchants, managers and employees at Rona," stated Pare. "We wish him every success in his future endeavours."

The company's announcement didn't include a statement from Dutton.

Rona chief financial officer Dominique Boies will be interim CEO while the company's board seeks a permanent successor, whom the company says must be bilingual.

On the Toronto Stock Exchange, Rona's shares closed up more than eight per cent, gaining 77 cents to $10.12 in Friday trading.