Home Depot eyes sale of wholesale operation

BY ROBERT P. MADER Of CONTRACTOR's STAFF ATLANTA The Home Depot announced Feb. 12 that the company and its board of directors have decided to evaluate strategic alternatives for its HD Supply business, including a possible sale, spin off or initial public offering of the business. The company said it neither could give assurance that any transaction would occur nor predict its possible terms or timing.

BY ROBERT P. MADER
Of CONTRACTOR's STAFF

ATLANTA — The Home Depot announced Feb. 12 that the company and its board of directors have decided to evaluate strategic alternatives for its HD Supply business, including a possible sale, spin off or initial public offering of the business. The company said it neither could give assurance that any transaction would occur nor predict its possible terms or timing.

Home Depot retained Lehman Brothers as its financial adviser to assist in the process. The company said that it does not expect to update its progress or announce any developments during the process unless the board of directors has approved a definitive transaction.

"Today's announcement is a continuation of the strategic review we did in November," said Frank Blake, Home Depot's chairman and CEO. "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."

HD Supply is Home Depot's wholesale distribution business and has nearly 1,000 locations nationwide and in Canada. It employs more than 26,000 people.

Home Depot started dabbling in the wholesale business in the late 1990s by opening a handful of Pro Stores and by purchasing Your "other" Warehouse and Maintenance Warehouse/America Corp. It really dove into wholesaling, however, with its December 1999 purchase of Atlanta-based Apex Supply.

Home Depot Supply opened its first standalone store in February 2002 in Mesquite, Texas. The company then bought Waco, Texas-based PVF wholesaler National Waterworks Holdings, a $1.5 billion distributor of products used to build, repair and maintain water and wastewater transmission systems (August 2005, pg. 7).

It made its "big" purchase just last year when it bought 500-store Hughes Supply, based in Orlando, Fla., for $3.47 billion (February 2006, pg. 1). The acquisition doubled the size of HD Supply to $12 billion.

The acquisition's connection to Robert Nardelli, then chairman, president and CEO, may be part of the reason Blake and his board are looking to sell HD Supply. The wholesaling operation was looked upon as the pet project of the now ousted CEO.

Reasons given for the possible sale, besides the usual optimizing shareholder value, is that Home Depot is at its core a retailer and the wholesaling business is a distraction. Whether selling HD Supply is a good business decision is open to debate.

Investment Website The Motley Fool said Feb. 16 that Home Depot is exploring selling HD Supply to placate one big investor.

"New CEO Frank Blake is extending the olive branch to big activist investor Ralph Whitworth, whose Relational Investors owns a 1.3% stake in the do-it-yourself home-improvement retailer. He's agreed to name a Whitworth colleague to the board of directors, and he's gone to personally meet with Whitworth regarding other measures that might improve the retailer's performance. That meeting led Blake to consider selling off the company's wholesale supply business," according to the Website. (www.fool.com/investing/value/2007/02/16/home-depot-severs-supply-lines.aspx).

For the fourth quarter, HD Supply sales grew by 64% and operating earnings grew by 20%. For the fiscal year 2006, Supply delivered sales growth of 162%, and operating earnings growth of 151%, wrote independent investor and financial blogger Todd Sullivan, who blogs at valueplays.blogspot.com.

Private equity firms now are jockeying for position. The Financial Times newspaper, London, reported March 1: "According to people familiar with the matter, Bain Capital has joined forces with Carlyle and Clayton Dubilier & Rice, while Thomas H. Lee Partners is partnering with Goldman Sachs buyout unit and CCMP, the former private equity arm of JPMorgan Chase. A third team of investors includes Blackstone, Kohlberg Kravis Roberts, Leonard Green Partners and Texas Pacific Group."