Home Depot sheds HD Supply unit

After spending the past decade building up its business-to-business division, home improvement products retailer Home Depot has sold the unit to a trio of private equity firms:Bain Capital, The Carlyle Group, and Clayton, Dubilier & Rice.

The three investment firms snapped up HD Supply for $10.3 billion on June 19. Home Depot put its wholesale arm up for sale four months ago and hired investment bank Lehman Brothers to auction the business.

HD Supply sells maintenance, repair, and operations supplies for multifamily dwellings, hospitality providers, and other businesses and facilities. In addition to print catalogs and Websites, 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.

Atlanta-based Home Depot launched the supply business in 1997. Former CEO Robert Nardelli expanded the HD Supply unit by acquiring companies such as water and sewer products supplier National Waterworks Holdings in 2005. Home Depot also paid $3.5 billion for major competitor Hughes Supply in March 2006. Clayton, Dubilier & Rice was among the final bidders in the Hughes Supply deal, according to a source close to the firm.

But HD Supply generated lower profit margins than Home Depot’s core retail business. The company came under pressure from shareholders pushing it to shed the unit, saying it was weighing down the retailer. Home Depot announced in February it was evaluating strategic alternatives for HD Supply, including a possible sale, spin-off, or initial public offering.

At the time, Home Depot chairman/CEO Frank Blake, who replaced Nardelli in February, described HD Supply as “a healthy, growing, and vibrant business.” Home Depot officials declined to comment about the deal, but industry observers weighed in.

Mike Petsky, a partner with investment bank Petsky Prunier, which is affiliated with Winterberry Group, notes that “the buildup of the wholesale division was Nardelli’s deal.” The sale allows Home Depot to get focused back on the consumer. “There is no reason why they won’t continue to seek and acquire established direct-to-consumer brands, retail or multichannel. As far as the M&A world, it’s another sign that private equity capital is one of the most likely exit options for large assets. These guys will take the company, institutionalize it, strip out the assets not producing, and take it public in a couple of years.”

Another deal watcher, Stuart Rose, managing director at investment bank Tully & Holland, says Home Depot “needs to get back to its foundation.” Retail rival Lowe’s has been on its heels, and the U.S. housing market is in a slump. “Perhaps by focusing only on retail, it may become a merchant again,” Rose says. “Nardelli did a lot of good things, but along the way the company lost its focus. Shedding this business will force it to become a retailer again.”