The weeks leading up to closing the deal on HD Supply has all the stuff for some kind of bizarre reality TV show that would even trump the Donald. The 18-percent reduction in the final price tag for HD Supply raises potential flags for distributors on a number of levels. Let's explore a few.
All three panelists at our Distribution M & A audio conference in May agreed that the M & A market was even hotter in 2007 than the year before, but that we might be nearing the end of a strong ride. Did the bell just ring? That large a discount reflects a combination of factors; the easy ones are the downturn in residential construction and the credit crunch. There were a number of internal factors that we won't know completely until a post-mortem can be created somewhere down the line. We're looking into that one.
When the dust settles, the new managers operate from a very different financial perspective. No matter how they structured the financing, they have $2 billion less pressure than they counted on, plus their new partner, Home Depot is taking a $1-billion piece of that debt pressure. Bottom line: If HD Supply is in my market (and face), and that applies to a number of distribution sectors, they have a little more flexibility as my competitor than they did with that extra $2B around their necks.
I keep seeing this image of a Wild West high-stakes poker game. This one just happened to play out in Manhattan. Home Depot starts reaching for the pile of chips in the middle of the table ($10.3 billion worth), when the three other players push back their chairs, I mean the deal deadline, pull out their pistols and say, "Not so fast, pardner." The town's banker gets fed up and has one foot out the door, when in slow motion the three amigos uncover that final ace under the bottom card. Game over. Home Depot buys a round of drinks, I mean $1 billion in financing for the deal, and the dealers flip their crestfallen opponent a tip, a 12.5-percent equity stake in their former ranch. Go to commercial.