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Home Depot to Sell HD Supply for $10.3B (updated)

The Home Depot, Atlanta, GA, has agreed to sell HD Supply to a team of private equity firms -Bain Capital LLC, Carlyle Group and Clayton Dubilier & Rice Inc. -for $10.3 billion, or roughly 10X-12X EBITDA.
The sale has been expected for weeks now, with a number of private equity firms rumored to have bid for the unit and several to have bowed out due to the down housing market -one of HD Supply's key customer bases. HD Supply reported a decrease in organic sales in the recent quarter.
For that reason, the firms likely paid closer to 12X EBITDA, according to Jim Miller, principal and a managing director at investment banking firm Vetus Partners, Cleveland, OH. When they started this process, I believe they were touting approximately $1 billion of EBITDA from HD Supply. With the recent softening of some of their end markets, particularly the residential end market, I'm guessing that HD Supply's most recent trailing 12 months' EBITDA was closer to $800 million than it was to $1 billion.
"That's a full purchase price, but I still believe that CD & R (and the other firms) are getting a good collection of assets and the investment will be a good one over time."
Little more than a month after former CEO Robert Nardelli retired, HD announced in February it would consider a potential HD Supply spin-off. Nardelli had pushed the wholesale division as a way to diversify HD's offering and spark growth  ; to balance out a slowing retail division.

Though HD had reported that some investors wanted it to stick with its HD Supply strategy, other investors were quite vocal on their dissatisfaction with the wholesale business, calling it a diversion from the retailer's core business. This included Ralph Whitworth, an activist investor whose firm, Relational Investors, recently won a seat on HD's board of directors.

Home Depot has spent the past few years building up its wholesale unit. It bought $5 billion diversified distributor Hughes Supply for 12X EBITDA in early 2006, and National Waterworks, at the time with $1.5 billion in annual sales, for $1.35 billion in mid-2005.
HD Supply made almost $4 billion in acquisitions in 2006.

"Home Depot has finally faced the inevitable truth they could not run the collection of companies they acquired over the past five years," said Adam Fein, president of Pembroke Consulting.

"The private equity firms taking over have the opportunity to build a unified common platform. But to do that, they will probably divest some of the companies that are a part of HD Supply."

Impact on M & A Market

In a recent MDM audio conference, Miller, who heads the distribution practice at Vetus, said that even talk of a potential HD Supply spin-off had a slight impact on valuations in the distribution M & A marketplace.

The effect of talk of a divestment came from two areas: "One, the position of Home Depot as a competitive buyer against another bidder, or at least the perceived threat of Home Depot as a competitive buyer," Miller said. "And two, Home Depot Supply as a potential exit opportunity. There were several private equity funds that were chasing distribution investments with the intent of buying them, holding them for a period of time and potentially flipping them to HD Supply."

Miller said that the final  ; sale price of $10.3 billion  ; is a "good sign" for distributors contemplating selling part or all of their businesses. He says that deals of this magnitude typically "set the bar" for valuations in the sector -valuations for smaller companies are then discounted from that bar. "Even with a significant discount to this bar, valuations for smaller distributors in this sector

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