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The Home Depot to Acquire National Waterworks

The Home Depot, Atlanta, GA, is entering distribution channel verticals on a larger scale. The world's largest home improvement retailer has agreed to acquire National Waterworks Holdings for $1.35 billion. National Waterworks Holdings, Inc., Waco, TX, is a distributor of products used to build, repair and maintain water and wastewater transmission systems. National, which had 2004 revenues of $1.5 billion and has a nine-year history of 9-percent compounded annual growth rate in sales, will operate as part of The Home Depot Supply.

Earlier this year, HD bought Utility Supply of America, a Chicago-based company that publishes the USABlueBook catalog ( into the same sector in a smaller deal, though the company did not disclose terms. Home Depot executives said it is the number one catalog merchant into the water treatment industry. The combination of the two deals into this sector this year roughly matches Home Depot's total acquisition activity ($1.5 billion) from 2001 to 2005. The Home Depot last year bought White Cap Construction Supply, a $500-million distributor of specialty hardware, tools and materials targeting large- and medium-sized construction contractors, expanding on the $64-billion retailer's strategy to expand its professional customer market base. White Cap became part of The Home Depot Supply division.

Home Depot estimates that National Waterworks has a14-percent share of the estimated $11 billion water and wastewater transmission equipment distribution business. That compares with Hughes Supply at 12 percent, and Ferguson with 7 percent. National Waterworks distributes a full line of pipes, fittings, valves, meters, fire hydrants, service and repair products and other components that are used to transport water to and from residential and commercial locations. Its products are for building, repairing and maintaining underground water and wastewater transmission and storm water collection systems. Through its network of over 130 branches in 36 states, National Waterworks sells directly to municipalities and contractors. For the fiscal year ended Dec. 31, 2004, it had net sales of $1.5 billion.

National Waterworks is principally owned by JPMorgan Partners, a private equity affiliate of JPMorgan Chase & Co., and Thomas H. Lee Partners, L.P. "In the three years since we acquired National Waterworks with JPMorgan Partner and Thomas H. Lee Partners, we have experienced substantial growth in sales and profitability," said Harry K. Hornish, Jr., president and CEO of National Waterworks.

In addition to enhancing its core stores, The Home Depot also is focused on expanding customer growth outside its current retail channels. In a conference call regarding the acquisition, Home Depot executives said they are attracted to MRO distribution sectors because they are less capital intensive and generate a higher return on capital than their traditional retail business.

Over the past few years, it has made smaller acquisitions in a range of markets that serve such business-to-business customers as maintenance and repair professionals, homebuilders and commercial builders. Together, Home Depot estimates these customers comprise an approximately $410 billion market opportunity.

HD's History in Distribution Markets
The Home Depot made its formal entrance into industrial and commercial markets with a 1,000-page, 15,000-item catalog called the Pro Book in 1996. It created its first Pro Store in 1997 next to a regular Home Depot outlet in California to provide better service levels. The Home Depot Supply is now a division with five retail locations in California, Arizona, Texas and Colorado. These stores average 80,000-100,000 sq. ft. and carry around 13,000 products, including job-lot quantities of professional grade building materials and supplies.

HD bought Maintenance Warehouse/America Corp. in 1996, San Diego, CA, a

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