PQ win puts Rona deal under new pressure

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Quebec premier-designate Pauline Marois indicated her Parti Québécois government will move to block takeovers by "foreign companies," casting a shadow over the proposed $1.8-billion takeover of Quebec home improvement retailer Rona Inc. by U.S. giant Lowe's Cos. Inc.

"I think that we want to prevent the sale of our headquarters to foreign companies," she said Wednesday in Montreal following the election of a minority PQ government the day before. Ms. Marois did not specifically mention Rona, nor did she detail how she would prevent such takeovers. Ahead of her comments, Rona's stock dropped 2.4 per cent in trading Wednesday to $12.51 a share, falling further below Lowe's proposed bid price of $14.50.

"We have to believe that [the Rona takeover] continues to face an uphill battle," Janney Capital Market analyst David Strasser said in a note.

Mr. Strasser added: "The odds still seem slim against a deal happening."

The PQ's victory "may seal the deal against Lowe's expression of interest in Rona," Credit Suisse analyst Gary Balter wrote.

"Combined with the negative reaction by many shareholders and opposition from Rona franchisees, this deal is looking very unlikely."

Despite the sabre-rattling over foreign takeovers, business observers said they were largely relieved by the election result, noting the minority outcome meant there would be less government meddling in the Quebec economy and in the affairs of giant public fund manager Caisse de dépôt et placement du Québec than they had feared if the PQ had won a majority.

If investors or businesses were worried about an economic policy upheaval during the campaign, "the election result gives certain reassurance we won't see in-depth changes," said Yves-Thomas Dorval, head of the province's main business lobby, the Conseil du patronat du Québec. "There were certainly threats the business community saw and they were worried it would slow the pace of investment. [With a minority government] they won't see them."

During the election, PQ Leader Pauline Marois pledged to raise taxes, increase mining royalties, toughen language laws that would add operating costs to businesses and loosen labour laws to favour workers. She invited the opposition parties Wednesday to co-operate with her on economic issues, and said the Coalition Avenir Québec, which opposed her plan to increase royalties, was ready to discuss the issue with her.

But observers speculated Ms. Marois will now have to back down or temper many of those proposals as she seeks to ensure a stable, functioning government until the next election.

"It's a very difficult situation for Pauline Marois," said Sebastian van Berkom, president of Montreal fund management firm Van Berkom and Associates. "She will not be able to proceed with any of her hard-core ideas" given their likely defeat by the Liberals and CAQ.

In the United States, market watchers were also sanguine. On a list of the biggest political risks worrying global investors, "I don't think the PQ makes the top 10," said David Rolley, who helps manage $32-billion ( U.S.) in global bonds at Loomis Sayles & Co. in Boston.

Meanwhile, both Ms. Marois and CAQ leader François Legault each pledged to push the Caisse – which is mandated by provincial law to both pursue superior returns for the funds it manages on behalf of Quebec pension and insurance funds and to help develop the province's economy – to invest more in Quebec.

Mr. Dorval said the government "will have to make difficult choices" given the province's high debt and would have to focus on "providing the best conditions possible to invest in Quebec."

Pierre Arbour, a former Caisse executive and long-time critic, said the government will be hard-pressed to make a convincing case for change at the Caisse, given chief executive officer Michael Sabia's success in achieving positive returns, improving risk management – and shrewdly investing billions of dollars in expanding Quebec companies. The Caisse has also acted coyly on the Rona file, upping its stake in the firm and indicating it won't support a deal that doesn't protect Quebec suppliers and franchisees.

"Why disturb something that is improving ever since Mr. Sabia was put in charge?" said Mr. Arbour. "The Caisse will satisfy their critics by saying 'Look what we've done recently.' "

Outspoken Montreal fund manager Stephen Jarislowsky likewise said the Caisse would be left alone. "I don't think that would be their first priority," he said, adding Mr. Sabia's performance so far has been "very good, the best performance in a long time at the Caisse. He should be safe. They're lucky to have him."

With files from reporters Rhéal Séguin, Daniel Leblanc, Joanna Slater and Reuters