POLITICS

Rona buying 20 stores in Quebec, Ontario, eliminating franchise structure

07/16/2015 08:49 EDT | Updated 07/16/2016 05:59 EDT
MONTREAL - Home renovation company Rona hopes to compete more effectively with large U.S. rivals by eliminating its franchise structure through the purchase of 20 stores that date to its entry into big-box retailing two decades ago.

The Quebec-based company said Thursday it is acquiring 18 franchise stores in Quebec and two in the Ottawa area for an estimated $225 million.

They include 17 big-box stores and three smaller outlets, making all 79 of Rona's big-box stores wholly owned by the company. Overall, the company (TSX:RON) will have 233 corporate and 275 affiliate stores in Canada operating under various banners.

"The competition we're facing in big-box retailing is all corporate, so it gives us agility to be more reactive to promotions, to be more proactive in terms of development across (Quebec) and it's more efficient overall in the company," Luc Rodier, executive vice-president retail, said in an interview.

Rona has been streamlining its operations for three years in an effort to cut costs and restore profits amid a tough retail environment.

Rodier said the change to a structure used by its rivals doesn't set Rona up for an eventual sale.

The franchisees approached the company six months ago about a purchase. Rona's has bought five other franchise locations since 2005.

The deal is expected to close in September, subject to a business review at each store.

In total, the Rona franchise stores have 2,600 employees and generate more than $500 million in annual sales.

Rodier said the deal won't affect employees and will go largely unnoticed by customers.

"For local communities there's very little change apart from the ownership. Local management stays, the staff stays, the service stays the same, the assortment will be Rona assortment."

Although the price of the acquisition wasn't disclosed, analyst Irene Nattel of RBC Capital Markets estimates Rona is paying about $225 million and will generate around $20 million in additional pre-tax operating earnings in 2016 and 2017. Accordingly she raised her target price to $18 from $17 per share.

While the transaction will simplify its business model, she said it does little to change overall task facing the company.

"With a challenging outlook for the Canadian housing market and modest consumer spending growth, we believe it will be difficult for Rona to generate meaningful sustainable top line growth after the current period of easy comparables," she wrote in a report.

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