As further proof that the dismal housing market is putting a crimp in the catalog/retail industry, Home Depot in late August finally sold its business-to-business division to three private equity firms — at an 18% discount.
The home improvement products retailer had in June agreed to sell its HD Supply business to Bain Capital Partners, Carlyle Group, and Clayton, Dubilier & Rice for $10.3 billion. But the deal hit a few snags on the way to closing, namely the faltering economic conditions in the housing and credit markets. On Aug. 28, Home Depot announced it had restructured its agreement with a new selling price of $8.5 billion.
Under the new deal, Home Depot will pay $325 million to keep a 12.5% stake in the HD Supply business. Total cash proceeds for Home Depot will come to $7.9 billion after the stake and other expenses.
Completing the transaction is no doubt a relief to Home Depot, which had alerted investors in early August that some roadblocks could thwart the deal. Had the private equity players decided to walk away from HD Supply, they would still have been on the hook for $310 million, according to a Home Depot filing with the Securities and Exchange Commission.
“The renegotiation of HD Supply highlights two issues in the current environment: a weak housing sector and tightening credit markets,” says Stuart Rose, managing director for Wellesley, MA-based investment bank Tully & Holland. Despite the back and forth before it finally closed, Rose says, the deal benefits both parties. “Debt markets are tight, which generally means the price of debt (interest rates) will increase.” And with the difficulty of finding debt and paying more for it on the horizon, “it will point to lower valuations,” he says.
Most of the money used to buy a business is debt, Rose notes. “There’s no telling how long or how low the market will go, but HD Supply’s repricing is an example of what happens when debt is hard to come buy. The next few deals will show whether prices for larger companies will come down.”