HD Supply recently announced it would sell its Industrial PVF division to Shale-Inland Holdings. This article looks at the impact of the deal on both companies and what’s next for HD Supply.
The decision to sell off the industrial PVF division of HD Supply was an easy one, according to CEO Joe DeAngelo. “It was a lot more speculative a business than we wanted to be in,” he said in an interview with MDM. Because of its “tremendous” working capital requirements and volatile ties to commodity markets, the division also had very different operating characteristics than the remaining divisions of HD Supply.
On the other side of the deal, where HD Supply saw a disconnect with its other businesses, Shale-Inland Holdings, a metals service center, saw a great complement. The division provides an inroad to the energy markets, a segment identified by Shale-Inland’s CEO Craig T. Bouchard as critical. “This has really been a vision of Shale-Inland to go in this direction,” Bouchard says. “We want to be the best metals provider into the energy segment.”
In addition, Shale-Inland will be able to add plate metals to its existing portfolio through the Metals Inc. division of HD Supply’s IPVF business.
Bouchard declined to publicly disclose the value of the transaction. But business and financial publication Bloomberg estimated the value at around $500 million, citing “people with knowledge of the matter.” Sales for the combined company will be around $1 billion annually.
In order to facilitate the deal, Shale-Inland, backed by private equity firm The Stephens Group, LLC, sought an additional firm, TowerBrook Capital Partners LP, which will be the majority stakeholder in Shale-Inland Holdings LLC once the deal closes. And because of the investing companies, the deal will be made without adding any long-term debt, Bouchard notes.
Bouchard will continue as CEO of the new combined company, which will continue to operate as subsidiaries of Shale-Inland Holdings under existing brand names such as Main Steel and Metals Inc. Shale-Inland’s existing business has a national presence, but only eight locations, Bouchard says. HD Supply IPVF adds 39 locations in 17 states.
Included in the acquisition – and another key driver of Shale-Inland’s acquisition of the division – was the management team. “These are people who have stayed with their companies even after joining the HD Supply team,” Bouchard says. “And I thought someone had made a mistake or just made up a number when I saw this, but they’ve – the companies that make up this division – reported 448 straight months of profitability.”
Impact on HD Supply
For some companies, selling off a continuously profitable division could be a difficult decision. But the impact to sales is relatively small, DeAngelo says. The division accounted for about 9 percent – $700 million – of the diversified distributor’s total annual sales in fiscal year 2011. “It’s not inconsequential but we’ll be able to make that up very fast through our other core leadership businesses,” he says.
The capital investment required for the IPVF division will be deployed across the remaining four core leadership lines of business: HD Supply Facilities Maintenance, HD Supply Waterworks, HD Supply Utilities and HD Supply White Cap.
“Those platforms are rock solid, and this will allow us to really focus on continuing to strengthen them,” DeAngelo says.
In the past year, HD Supply also sold off its heating, ventilation and air-conditioning business to Hajoca. The company has no plans to sell additional divisions. “Right now, we have the leadership platforms we like and we want,” DeAngelo says. “We have a value proposition that fits a low-risk profile and a high-return profile, which is what we look for.”
The company’s focus will be on building those remaining businesses through organic growth initiatives, but it will also “intensify our business development efforts on acquiring strong companies that will integrate very naturally intro these leadership platforms,” he says. “We are not looking for new leadership platforms.” Targets for expansion include adjacent vertical markets, adjacent or vertical product lines, and geographic expansion – particularly in the Northeast and Pacific Northwest.
While DeAngelo declined to provide information on specific targets for acquisition, he noted: “We have a very focused list of folks we’d like to bring into our family.”