Is HD Supply Deal a Sign of the Times?

Like most deals, the news that HD Supply is selling its HVAC/Plumbing business to Hajoca, first reported by MDM, has a few interesting side stories to it, including HD Supply’s continued downsizing and the overall direction of the industrial wholesale distribution industry. Here are some thoughts I had when I learned about the deal on Friday.

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HD Supply’s downsizing. In a good move for Hajoca, it strengthens its position in the Southeast, the heart of the Hughes Supply business that formed the core of the original HD Supply. It allows HD Supply to continue to streamline its diverse portfolio to focus on its core and generate cash to improve its balance sheet.

The Home Depot bought Hughes Supply at a premium in early 2006 for $3.2 billion plus debt – at the time around 12X EBITDA. Hughes Supply was at its peak, with record annual revenues of $4.4 billion. That acquisition more than doubled HD Supply’s revenues to more than $12 billion and expanded the business' reach in waterworks, professional construction supply and multifamily maintenance. Before the Hughes Supply purchase, Home Depot's largest buy was National Waterworks, a $1.4 billion distributor.

After the Hughes purchase, HD Supply continued to be a primary consolidator across many distribution sectors. A year and a half later, The Home Depot sold the HD Supply division to a trio of private equity firms just as the residential downturn worsened. For distribution company owners, it started what was coined (by Jim Miller of Supply Chain Equity Partners) as the "Home Depot hangover," as valuations dropped and debt markets tightened with the recession.

The direction of industrial distribution. As this industry has gone through waves of consolidation for the better part of 20 years, one question that frequently arises is who might consolidate industrial distribution? W.W. Grainger was the likely one to do it in the 1990s. As HD Supply grew its annual revenues past $10 billion with a blistering acquisition pace in the mid-2000s, it looked like the candidate had been found.

But this latest move – HD Supply's divestment of its HVAC/Plumbing business – once again calls into question whether one consolidator will ever be able to pull it off across such diverse sectors and within such fragmented markets. HD Supply has also divested other businesses, including its Lumber and Building Materials operations, while it strengthens others.

It feels more to me as if this latest deal is one step of many as industrial distribution sectors return to a state of equilibrium.