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DeAngelo: Selling Waterworks ‘Transformational’ for HD Supply

Yet another divestiture helps distributor focus on core businesses.
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The long-rumored sale of HD Supply's waterworks business finally occurred last week, and the divestiture – its fifth in three years – will be another "transformational" move for the company, according to President and CEO Joe DeAngelo.

"It enables us to leap forward as we extend our customer-centric service differentiation," DeAngelo told analysts in the fiscal first-quarter earnings call. "We will accelerate next-generation growth investment and innovation as we forward execute."

HD Supply sold the division to the private equity firm Clayton, Dubilier & Rice for $2.5 billion, leaving the Atlanta, GA-based distributor with only its facilities maintenance and construction & industrial businesses.

The company in recent years has sold its Litemor business, hardware solutions, power solutions and interior solutions.

Selling power solutions in 2015 to Anixter for $825 million was the company's most transformational move until unloading waterworks last week. At the time of the sale, DeAngelo told MDM that the sale "positions us to get faster and better."

Will this latest deal also accomplish that? Proceeds from the sale will be used to reduce debt while also launching its first ever share repurchase program and focusing on what DeAngelo called "less cyclical" businesses in facilities maintenance and construction & industrial.

"But the sale doesn't make sense," says Alex Moazed, founder and CEO, Applico. "Waterworks was the company's second-largest segment and had pretty decent margins. The largest unit, for facilities management, hasn't fared as well since the EBITDA dropped nearly 3 percent. Hopefully the company can pull out of this slump quickly."

From the private equity side, however, the transaction fits with what analysts said in our recent article, 2017 State of M&A in Distribution: ‘Never Been a Better Time to Sell’, and could portend more deals on either the financial or strategic side.

“2017 is shaping up to be another very strong year,” says Jason Kliewer, co-head of Baird’s distribution group. “The credit markets are very strong, private equity buyers are sitting on record amount of dry powder (cash to deploy), and strategics are looking for ways to enhance organic growth. So the drivers are in place and strong M&A activity looks set to continue."

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