Atlanta-based Home Depot is evaluating strategic alternatives for its HD Supply business, including a possible sale, spin-off, or initial public offering. It has retained Lehman Brothers as its financial adviser to assist in this process.
The business-to-business division of Home Depot, HD Supply sells maintenance, repair, and operations (MRO) supplies for multifamily dwellings, hospitality providers, and other businesses and facilities. In addition to selling via print catalogs and the Web, it has nearly 1,000 locations nationwide and in Canada. The division accounts for about 15% of Home Depot’s $81.5 billion in revenue.
The Feb. 12 announcement ” is a continuation of the strategic review we did in November,” Home Depot chairman/CEO Frank Blake said in a statement. “We are undertaking this action today because of our desire to increase our focus on our retail business. With annual revenues of approximately $12 billion, HD Supply is a healthy, growing, and vibrant business, and we are undertaking this evaluation to determine whether there are strategic alternatives with respect to HD Supply that would optimize shareholder value.”
Analysts have looked down on the HD Supply unit for generating lower profit margins than Home Depot’s core retail business. Even so, Stuart Rose, managing director of Wellesley, MA-based investment bank Tully & Holland, finds the timing of the announcement odd. After all, during the first nine months of fiscal 2006, he says, the company made 10 acquisitions for HD Supply, including the March 2006 acquisition of Hughes Supply for $3.5 million. “So this is a rapid course reversal,” Rose says.
Then again, the replacement of former CEO Robert Nardelli, who resigned in January, with Blake was rapid as well. Some observers suggest that the possible divestiture of HD Supply, which Nardelli had wanted to continue expanding–sends a message to the marketplace and Wall Street of a new direction for Home Depot.
“There is no doubt the reversal is due to the change in CEOs,” Rose says. “However, the board approved the strategy less than a year ago, as evidenced by the acquisitions. It’s interesting to see how much one person makes a difference.”
What’s more, Rose says, the “de-acquisition” of HD Supply might be expensive. “While the company has scale, most of the acquisitions were made while housing was in a boom,” Rose explains. “So top dollar was paid. Now, with housing prices down, they want to sell. It seems as if this will be the classic ‘buy high sell low.’ Though once housing rebounds, this business will likely thrive.”