Home Depot: Selling Supply Not an Easy Decision

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June 20, 2007

Home Depot: Selling Supply Not an Easy Decision

Home Depot CEO Frank Blake said Wednesday that selling HD Supply in pieces would have been time-consuming and distracting, with an added cost of separating the businesses. An IPO would have resulted in a multiple discount relative to the sale of the entire business.

"This was not an easy decision," Blake said about the announcement Tuesday that Home Depot would sell its $12 billion wholesale division in its entirety for $10.3 billion to a group of three private equity firms. "(HD Supply chief) Joe DeAngelo and his team have built a world-class operation over the last few years. We gave careful consideration to a number of options, including holding onto the business."

The three private equity firms buying HD Supply for roughly 10X-12X EBITDA are Bain Capital LLC, Carlyle Group and Clayton Dubilier & Rice Inc.

Blake said DeAngelo would be following HD Supply to its new owners.

Blake confirmed that Crown Bolt, whose primary customer is Home Depot, is included in the sale of HD Supply to the private equity team. HD has entered a seven-year supply agreement to maintain the supplier relationship with Crown Bolt. Contractors Warehouse is also included in the sale.

The Home Depot initiative to grab higher share of the professional contractor market through its retail operation will remain, Blake said. "We do close to 50% of our business with pros out of our retail operation," he said. "Those efforts are going to continue."

Much of the conference call with analysts Wednesday focused on HD's decision to improve its retail operations. "We will make the investments needed to improve the business," Blake said. To that end, Blake announced HD would be awarding assistant store managers performance-based equity in the business. "For our business we believe that is a critical. We want to establish an ownership mindset throughout the organization."

The sale of HD Supply 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.

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.

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Beyond the HD Supply Factor: Order the CD and transcript from MDM's recent audio conference to gain more perspective on how HD and other big players' moves have affected the market and the impact of outside investment on the channel. Also learn practical tips from industry experts such as what it's like to work for a private equity firm and median valuations for big, medium and small businesses.

Also available, order the CD from MDM's audio conference on Succession Planning.

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