DBRS Confirms Lowe’s Companies, Inc. at A (low) following Bid to Acquire RONA inc.

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Lowe’s Companies, Inc. (Lowe’s or the Company) at A (low) as well as its Short-Term Rating at R-1 (low), all with Stable trends. This action follows the Company’s announcement that it has entered into a definitive agreement under which Lowe's is expected to acquire all issued and outstanding common shares of RONA inc. (RONA) for CAD 24 per share in cash and all issued and outstanding preferred shares of RONA for CAD 20 per share in cash. The total transaction value including the assumption of RONA’s debt is CAD 3.2 billion ($2.3 billion; the Transaction or Acquisition).

The Transaction has been unanimously approved by the boards of directors of both Lowe’s and RONA and is supported by the management teams of both companies. The Transaction is, however, subject to approval by RONA’s common shareholders and customary closing conditions, including regulatory approvals. It is not subject to Lowe’s shareholder approval. The Transaction is expected to close in H2 2016.

RONA is a major Canadian retailer and distributor of hardware, building materials and home renovation products. RONA operates a network of close to 500 corporate and independent affiliate dealer stores in a number of complementary formats. With its nine distribution centres, RONA serves its network of stores and several independent dealers operating under other banners, including Ace, for which RONA owns the licensing rights and is the exclusive distributor in Canada. DBRS estimates that RONA generated consolidated sales of about CAD 4.1 billion and EBITDA of approximately CAD 230 million in 2015.

DBRS’s last confirmation of RONA’s ratings on November 25, 2015, reflected the company’s solid operating performance (growth in same-store sales and margin expansion) through the end of Q3 F2015 in the face of macroeconomic headwinds in certain regions of Canada and its reasonable leverage levels, which includes consideration for the company’s share-repurchase activity and acquisitions of the 20 franchise stores in its network.

While the Acquisition is relatively small for Lowe’s on a consolidated basis (Lowe’s EBITDA was about $6.8 billion for LTM ended October 30, 2015), it catapults the Company’s position and scale in the Canadian market, including Québec, where Lowe’s did not have a presence and RONA is a market leader. DBRS believes that the Transaction provides significant opportunities for both revenue and cost synergies by leveraging Lowe’s consolidated scale and RONA’s local expertise. More specifically, the combined entity could benefit from Lowe’s omni-channel and private-label capabilities. In terms of costs, the combined entity should benefit from stronger negotiating power with suppliers and potential efficiencies regarding overheads.

DBRS’s previous confirmation of Lowe’s ratings on May 27, 2015, reflected the Company’s strong brand and its number two position in an intensely competitive and mature North American home improvement retail market. The ratings also considered Lowe’s large size and scale as well as its prudent financial management.

The Company has indicated that the Acquisition will initially be funded through a committed financing arranged by RBC and CIBC in the form of a bridge facility. Lowe’s expects to take out the bridge facility with a combination of pre-payable and permanent financing. In terms of financial profile, DBRS estimates the Company’s pro forma lease-adjusted debt-to-EBITDAR (which includes operating leases capitalized at 6.00 times (x)) to increase to between 2.25x and 2.50x from about 1.90x as on October 30, 2015. That said, Lowe’s strong free cash generation and flexible share repurchase program will enable it to reduce leverage to between 2.00x and 2.25x and within the range of the current rating category in approximately one year’s time.

Despite the risks associated with the effective integration of RONA, DBRS believes that the relatively modest magnitude of the Transaction and the temporary increase in financial leverage keep Lowe’s credit risk profile in a range acceptable for the current rating category. Should Lowe’s be challenged to maintain credit metrics in a range acceptable for the current A (low) rating because of weaker-than-expected consolidated operating performance or more aggressive-than-expected financial management (i.e., slower deleveraging), the current ratings could be pressured.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.