Large shareholder launches battle for control of Rona's board of directors

MONTREAL -- A battle for control of home renovation company Rona was formally launched Wednesday after the company's second-largest institutional shareholder said it was seeking to sweep out the existing board and install new directors.

Invesco Canada, which owns about one-tenth of Rona Inc. (TSX:RON) shares, issued the call for change after the chain reported dismal financial results last week and its long-time chief executive resigned.

The unexpected departure of Robert Dutton came two months after he and the other Rona directors fended off a takeover by American rival Lowe's.

Invesco announced in a brief release Wednesday morning that it plans "to requisition a meeting of shareholders of Rona Inc. for the purpose of removing Rona's current directors and electing new directors in their place."

The fund manager declined to comment on what prompted its bold move to replace Rona's board or indicate what level of support it has mustered from fellow shareholders.

Invesco, which operates Trimark, Invesco and PowerShares brands, controls 12.3 million shares of Rona on behalf of investors.

IA Michael Investment Counsel, manager of ABC Funds, which owns about three million shares representing 2.5 per cent of Rona, said it is backing Invesco's move.

"We support change, we think it's due," company president Irwin Michael said in an interview from London, Ont., expressing his disappointment that Rona's management and board didn't pursue discussions with Lowe's.

Michael said he hasn't been contacted by Invesco and isn't sure what kind of support will be offered by other shareholders, including independent owners, which form a large block.

"We don't know what the independents will say or do. It's the silent majority that will decide on this," he said.

"Maybe the Invesco group comes forward with a very interesting board of directors. We'd like to see what they have in mind, but clearly it's a really positive catalyst for the stock at this point. It's not a done deal, but nonetheless it's a positive obviously for shareholders who have been on a wild ride on this."

Institutional investors are unhappy with years of weak results at Rona and the board's unwillingness to entertain a $14.50 per share cash takeover bid that represents about a 45 per cent premium from when the company's stock has traded for much of the past year.

Rona said in its proxy circular last year that $100 invested in the company at the end of 2006 was worth little more than $42 five years later.

"It has been a slow grind for the last five years of destructive shareholder and share price and so something's got to be done. We start with a resignation from Mr. Dutton, this seems like a logical next step and we'll take it from there," added Dana Merber, a colleague of Michael.

Shares were up 3.6 per cent Wednesday afternoon, rising 40 cents at $11.38 on the Toronto Stock Exchange.

But other Rona shareholders were laying low, unwilling to comment on Invesco's efforts.

The Caisse de depot, Rona's largest shareholder, said it won't tip its hand at this point and Dimensional Fund Advisors said it "doesn't comment on individual companies or sectors." British Columbia Investment Management Corp. declined comment.

Franklin Templeton said it has nothing to add from the comments Richard Fortin, portfolio manager at Bissett Investment Management, made in September in support of dramatic change at Rona.

"We believe that a strategy which focuses solely on the execution of Rona's current business plan while excluding all other value creating alternatives (including a potential combination with Lowe's) isn't in the best interest of shareholders and is the wrong approach."

A Rona spokeswoman said the company will likely respond to Invesco's move on Thursday.

On Monday, it denied a newspaper report that it has received a new takeover offer from Lowe's or has held discussions with its U.S.-based rival.

Derek Dley of Canaccord Genuity said he's not surprised that large shareholders are restless but wondered why they've waited until now to act.

"We're a little bit unsure about why this wasn't something that shareholders that were looking for a sale, why they didn't do this earlier this summer when the bid from Lowe's was still on the table," he said from Vancouver.

Dley said it is unlikely that the Caisse would support Invesco's move. And independent store owners who control about 10 per cent of Rona shares would likely resist.

"It's going to be challenging because likely your two biggest shareholders are going to be in support of the current board."

Nonetheless, Dley expects any move to oust Rona's board would be a drawn-out process.

Any takeover by Lowe's would also likely face scrutiny from the Quebec government, which -- when in opposition -- aligned itself with vows from the Charest government to give Rona the power to block such a move.

Rona 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.