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(B)(N) RON Rona Incorporated

November 15, 2012

Drama. Today’s contenders in a Conflict of Interests in the Capital Arena are our neighbourhood hardware stores, RON Rona Incorporated, and the investment and mutual fund giant, IVZ Invesco Limited of Peachtree Street North, Atlanta, GA, United States, represented by its wholly-owned Canadian subsidiary, Invesco Canada Limited (Reuters, November 14 2012, “Major Rona shareholder Invesco seeks to replace board”). At stake is a possible but apparently uncertain and unsolicited takeover offer by a third party at a price of $1.8 billion or $12 per share which is perhaps 30% above the ambient stock prices of $9-$10 earlier this year (please see Exhibit 1 below).

The money trail to the two largest shareholders has about $180 million for Invesco which owns 10% of the stock and manages $10 billion or more of other people’s money already (please see Exhibit 2 below) and $270 million for the Caisse de dépôt et placement du Québec which owns about 15% of the stock and manages about $160 billion of other people’s money as well although we don’t know whether either party is  “cashing in” or “cashing out” because we don’t know what they paid for the stock and how long they’ve been holding it. It “retailed” for $14-$16 two years ago and Rona currently pays a dividend of $0.28 per share or $40 million per year which is not a bad yield (2.8%) for the rest of us on a $10 stock.

Rona also has “fair play defences” such as issuing 100 million new treasury shares at $10 per share (possibly with a warrant to benefit from future performance) which would give them $1 billion in cash to further build and buff their business. That’s what we’d do.

The Risk Chart (Exhibit 1 below) shows that we have not owned the stock since between $12 and $15 in 2009-2010 (Stock Price (SP) Red Line over Risk Price (SF) Black Line). The ambient stock price, of course, has nothing to do with the company’s day-to-day business or future performance. In effect, the “dog will wag its own tail” regardless of our “thumbs up” or “thumbs down” from the sidelines.

Exhibit 1: (B)(N) RON Rona Incorporated – Risk Chart

Rona Incorporated is engaged in the distribution and retail of hardware, home improvement and gardening products in Canada. Its company-owned and  privately-owned franchise stores offer automotive products, building materials and accessories, decoration products, gutter and accessories, hand tools, and so forth.

(Please Click on the Chart to make it larger if required.)

The Risk Chart for Invesco (Exhibit 2 below) shows that we could have owned shares in Invesco at various times and prices (Red Line over Black Line) but the stock price is also volatile and uncertain  – What did they do or not do in 2008? – and the dividend is $0.69 per share or $320 million per year for a current yield of 2.9% (similar to Rona which they have suggested is “under performing” somehow). One might also consider that owning stock in a money management firm is effectively “cash” buying an interest in “cash” that we could just as well run ourselves. Please see, for example, our Post, Investor Angst, November 2012.

Exhibit 2: (B)(N) IVZ Invesco Limited – Risk Chart

Invesco Limited is a global investment management company, which provides enduring solutions for retail, institutional and high-net-worth clients around the world. Invesco Canada Limited operates under the well-known product brands of Trimark, Invesco and PowerShares and is one of Canada’s largest investment management companies.

(Please Click on the Chart to make it larger if required.)

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