(Reuters) - Lowe's Cos Inc (LOW.N), the world's No. 2 home improvement chain, has offered to buy Rona Inc RON.TO for C$1.8 billion ($1.8 billion), but the struggling Canadian retailer said its own turnaround plan offered a better chance of success.
Rona, Canada's home-grown answer to Lowe's and Home Depot Inc (HD.N), said the C$14.50 a share proposal was not the best deal for its shareholders. Smarting from years of disappointing sales, it wants to close some of its big box stores and focus on smaller outlets that it says its customers prefer.
The government of Quebec, Rona's home province, said the offer was not in the best interest of either Canada or Quebec and that it would examine how best to counter the proposal.
Lowe's said its plan has the support of institutional shareholders with about 15 percent of Rona's outstanding shares. Its July 8 proposal represents a 36.7 percent premium to the stock's closing price on Friday, July 6.
"We are disappointed that the Rona board said no," Doug Robinson, Lowe's head of international operations and development, told Reuters in an interview. "We really want to take a little bit of time to consider options."
At stake is both Rona's long history as an independent company deeply rooted in Quebec, and Lowe's attempt to kickstart its Canadian expansion by acquiring hundreds of stores and a national distribution network.
Rona's shares were up 18.9 percent at C$14.11 on Tuesday.
Morningstar analyst Peter Wahlstrom saw little chance Lowe's, based in North Carolina, would go ahead with a hostile bid straight to shareholders.
"They are seeking the approval of the board," he said. "This could take a little while, before both parties get comfortable with each other, the way that they operate and also the ultimate price tag."
Boucherville, Quebec-based Rona has struggled as Home Depot and Lowe's have made inroads into its home turf. Sales at Rona's established stores, or same-store sales - a key measure for retailers - dropped 7.3 percent in the year ended December 25, 2011.
Rona blames its weak performance on poor consumer confidence. Since Home Depot nor Lowe's break out Canadian results, it is difficult to compare them to Rona, but in its last two reported quarters, Home Depot said same-store sales rose in Canada.
Under a strategic plan announced in February, Rona is closing or splitting up 23 of its 79 biggest outlets and opening smaller "satellite" and "proximity" stores.
Rona spokeswoman Michelle Laberge said a special committee of the board had considered Lowe's offer.
"They believe that the plan that we have announced and that we are rolling out right now has greater potential to create more value in the mid- to long-term," she said
Lowe's said the two companies' chief executives first met in July 2011, at Rona's request, "to discuss a potential relationship." It said an earlier proposal to acquire Rona, dated December 15, 2011, was rejected by Rona's board.
Robinson said the new proposal was "marginally" higher than the December one.
Lowe's operates more than 1,745 stores in North America, including 31 in Canada. Bigger rival Home Depot, which has been in Canada more than a decade longer, has 180 Canadian outlets.
Rona, founded in 1939 by independent hardware stores in Quebec keen to ditch their powerful wholesalers, operates nearly 800 locations and supplies almost 1,500 stores in Canada, most of them smaller than Lowe's big-box stores. Many Rona dealers are family businesses with a long history in the network, and a stake in the public company.
Lowe's said in a statement that it would be committed to preserving Rona's diverse formats.
"I have read many comments where people said that Lowe's would not be interested in the smaller format or the dealer businesses (of Rona). That is just factually incorrect," said Robinson.
Quebec finance minister Raymond Bachand said in a statement he had asked economic development agency Investissement Quebec work out what could be done to counter Lowe's offer, including "setting up a fund to defend Quebec's interests."
"In due time, we look forward to the opportunity to meet with the government to address any questions or concerns they may have," Lowe's said in a statement.
Pension fund Caisse de dépôt et placement du Québec said it will evaluate the offer based on the value it creates for its depositors and shareholders, but also factor in the importance of the continuing development of Rona's Quebec supplier network.
The Caisse held 12.18 percent of Rona's outstanding shares on June 28, according to Thomson Reuters data.
Caisse, formed nearly five decades ago by the government of Quebec to manage the funds of the Quebec pension plan, also has a mandate to contribute to the province's economic development.
Lowe's said it would keep Rona's Canadian head office in Boucherville, just outside Montreal.
The proposed deal would need approval from Canada's federal industry ministry, as is the case for any large foreign takeover.
Speculation about Lowe's intentions came front and center in early April when one of the U.S.-based chain's top executives told Reuters that Rona was a "very interesting company.
Rona insisted it was not for sale.
But even before Tuesday's news, the stock had risen 12 percent in three months, partly on hopes that Lowe's might bid.
Rona has both common shares and preferred shares, but holders of preferred shares are not entitled to vote at its shareholder meetings.
Scotiabank and BMO Capital Markets are acting as Rona's financial advisors, with Norton Rose Canada LLP and Davies Ward Phillips & Vineberg acting as its legal advisors.
Lowe's financial advisors are CIBC World Markets and Bank of America Merrill Lynch, and Stikeman Elliott and Hunton & Williams are acting as its legal advisors.
Writing by Allison Martell; additional reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Frank McGurty and Janet Guttsman