Home Depot's announcement that it is selling its wholesale division HD Supply for $10.3 billion to a trio of private equity firms – Bain Capital, Carlyle Group and Clayton Dubilier & Rice – is hardly a surprise, given the media coverage that led up to it. Though we don't know all the details yet, there are already a few takeaways from the news:
1. As Grainger President and COO Jim Ryan said in mid-May (Grainger: Consolidation is Changing Marketplace), just because HD Supply has been been sold does not mean that it disappears as a player in the market. Still, HD Supply's new owners will have the same challenges in unifying its diverse businesses as Home Depot itself did. "The challenges in building the HD Supply business exist regardless of who owns them. … It takes time, patience and a lot of money. That said, it can be done. But a change in ownership doesn't change any of this."
2. It is fairly common for private equity firms to buy a company and immediately sell some of its assets. This will likely occur with HD Supply; as the new owners build up the company, they will probably use diversified distributor Hughes Supply as a platform. HD Supply acquired the $5.5 billion distributor for $3.4 billion (12X EBITDA) at the start of 2006.
3. Charles Banks, former CEO of Wolseley plc, a plumbing/HVAC and building materials distributor based in London, is an operating partner at Clayton Dubilier & Rice. (From Strategic Player to Financial Buyer, MDM, March 25, 2007) He likely played a key role in making the HD Supply deal happen. On that note, might it make sense for the new owners of HD Supply, looking to fully integrate the company, to sell National Waterworks to a giant like Wolseley, where the synergies may be greater? It all depends on which direction the firms decide to take HD Supply – whether they decide to focus on building materials, a well developed side of the company, or lean toward industrial and infrastructure.
4. The high valuation multiple is good news for distributors, according to Vetus Partners' Jim Miller. Some in the industry were expecting buyers to pay as low as 8X EBITDA for the supply division. But the purchase price was closer to 10X, and maybe even 12X (based on $800 million in EBITDA). So smaller distributors looking to sell can expect recent strong valuations to stick around. Valuations generally are made at a discount from the bar set in large transactions, such as this one.
5. Adam Fein, president of Pembroke Consulting and author of the Distribution Trends blog, said that this move shows how serious private equity firms continue to be about investing in distribution companies. He also noted that consolidation tends to follow customer trends – when customers consolidate, their suppliers tend to follow suit. The distribution industry however remains fragmented "because it is built on services and sales to local customers."
