The Rona Home & Garden Golden Mile store located in Toronto.Fred Lum/The Globe and Mail
One of Rona Inc.'s largest shareholders is calling for the ouster of its board of directors in the wake of a spurned takeover overture and weak results, paving the way for a faceoff between influential shareholders and the provincial government.
Invesco Canada Ltd., a long-time Rona shareholder that controls more than 10 per cent of its stock, said on Wednesday it plans to launch a proxy fight "for the purpose of removing Rona's current directors and electing new directors in their place."
Invesco was among a handful of major Bay Street investment firms that backed a $1.8-billion informal offer by U.S. home-
improvement rival Lowe's Cos. Inc. for the Canadian merchant last summer.
Invesco didn't elaborate on its goals for removing the board, but other shareholders expect a renewed effort to resurrect a Lowe's deal, which was rejected by Rona's board.
"Invesco's end game is still to try to get a deal done," predicted Norman Levine, managing director of Portfolio Management Corp., which is a small shareholder in Rona. "I'm thrilled. … They were the ones that had to do this."
Shares of Rona jumped nearly 5 per cent Wednesday.
The battle is unfolding with the backdrop of the Parti Québécois government, which opposes a foreign takeover of a retailer described by the province's former finance minister as a "strategic interest."
He warned an acquisition by Lowe's would squeeze Rona's employees in the province and its suppliers.
Invesco is pushing for board reform after Rona parted ways with its chief executive officer last week amid signs that the Caisse de dépôt et placement du Québec, which also opposed a Lowe's takeover, was getting impatient with the Canadian retailer's poor results. The Caisse is Rona's largest shareholder.
Now Invesco, which has seen Rona shares fall sharply in recent years, is feeling the pressure to force radical change.
While dissatisfied shareholders in Canada lack an activist track record, their approach could be changing, following some funds that have moved more aggressively in recent years to shake up such lagging companies as Canadian Pacific Railway Ltd. and Maple Leaf Foods Inc.
Last year, U.S. investor William Ackman, with a key stake in CP, agitated for reform by getting a new board installed as well as his hand-picked CEO.
Fund manager Irwin Michael, whose firm is Rona's third-largest shareholder, hinted he would support Invesco's bid to replace Rona's board.
"We support change because the status quo of the company, we believe, is untenable," said Mr. Michael, whose firm owns nearly 3.7 million Rona shares in its ABC Funds. "The earnings that came out last week were very weak. … Rona is losing market share, certainly in relation to Home Depot, which is picking up share. And you have no one running the company."
Last Friday, Rona said it had hired recruitment firm Korn/Ferry to find a new CEO to replace Robert Dutton. But the process could drag on for three to 12 months, Mr. Michael said.
Rona spokeswoman Michelle Laberge said the board of directors was meeting late Wednesday to decide the next steps, but that it had not formally received the requisition from Invesco.
Invesco's Ian Hardacre declined to elaborate, but last August he said his firm was "extremely disappointed" in Rona's management team and its running of the company.
"There has been an extraordinary misallocation of capital over the last five years," Mr. Hardacre said at the time. "The return on capital has decreased every single year."
Last week, Rona released weak third-quarter results that saw profit plummet 89 per cent to $5.1-million. Michael Sabia, CEO of the Caisse, made it known to Rona's board that he wasn't happy with the retailer's performance, a source said. A Caisse spokesman wouldn't comment.
Domestic retailers have struggled with a sluggish economy, debt-ridden consumers and steeper foreign competition. Still, U.S. giant Home Depot Inc. reported this week that its Canadian division had enjoyed "positive" third-quarter same-store sales, an important retail measure of sales at outlets open a year or more. Those quarterly sales at Rona dropped 1.2 per cent.
Rona's results have been challenged for the past five years, prompting Mr. Dutton, the CEO of two decades until last Friday, to introduce a new strategy earlier this year of focusing more on smaller stores and closing some big-box outlets.
Mr. Levine said political opposition in Quebec to a foreign takeover of Rona may now change. "If it's going to be a basket case, what's the point?"
He said Invesco's strategy of trying to get shareholder approval to overthrow the board is easier than trying to get the nod for a Lowe's takeover. Replacing the board requires a 50.1-per-cent vote compared with a two-thirds majority needed for an acquisition, he said.
In a statement Wednesday night, Rona said Invesco had contacted it in the past few days to request a meeting with Rona chairman Robert Pare; they had agreed to meet later this week. But Invesco indicated earlier in the day that it no longer wanted to hold the meeting and issued its press release saying it intended to seek new directors, Rona said.
The retailer said it will hold its annual meeting for shareholders on May 14.