Home Depot Changes Course on HD Supply

Last year Home Depot put a lot of effort and money into expanding its HD Supply business. It acquired nine companies for the business-to-business division, including major competitor Hughes Supply, which it bought in March 2006 for $3.51 billion.

So many observers were taken aback when Home Depot announced on Feb. 12 that it was evaluating strategic alternatives for HD Supply, including a possible sale, spin-off, or initial public offering. The Atlanta-based firm has retained Lehman Brothers as financial adviser to assist in the process.

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 in the U.S. and Canada. The division accounts for about 15% of Home Depot’s $81.5 billion in revenue.

“We are undertaking this action today because of our desire to increase our focus on our retail business,” Home Depot chairman/CEO Frank Blake said in a statement. “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, investment bank Tully & Holland, finds the timing of the announcement odd, given the company’s investment in the division during the past two years. “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. Many believe 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,” he notes. “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.”

HD Supply: recent acquisitions

June 2005: Acquires $444 million Williams Bros. Lumber Co.

July 2005: Acquires $1.5 billion National Waterworks Holdings.

March 2006: Acquires Hughes Supply, a wholesaler of construction, repair, and maintenance supplies, for $3.51 billion. The acquisition more than doubles the size of HD Supply.

May 2006: The Williams Bros. Lumber division acquires Cox Lumber, Florida’s largest independent dealer of lumber and building materials; the Creative Touch Interiors division buys Rice Planter Carpets, a supplier in South Carolina.

July 2006: The White Cap Construction Supply unit acquires Texas Contractors Supply. Also, Williams Bros. Lumber buys Sarasota, FL-based Forest Products Supply.

August 2006: HD Supply’s electrical division acquires Arizona distributor Edson Electric Supply; HD Supply of Canada buys electrical utility distributor Grafton Utility Supply.

October 2006: HD Supply Waterworks, a division specializing in building, maintainance and repair of water and wastewater systems, acquires Heartland Waterworks Supply, a Kansas City, MO-based distributor. And the White Cap Construction division acquires Burrus Contractors Supply, a distributor of concrete accessories and forming systems in Texas and Louisiana.