The 2020 Mid-Year Economic Update_long

Commentary: Dust Won’t Settle on HD Supply


Be careful not to get a sugar high from the HD Supply spin-off announced this past week. After a deal of this magnitude, it's easy to get excited about what it means once the dust settles. But the dust won't settle on HD Supply. If anything, the non-contributing or distracting units will be shed and a leaner, more focused business will emerge. It was not purchased to be gutted or dismantled. The remaining entity, while smaller in size, will likely continue as the lead consolidator in a narrower band of distribution verticals.


The deal will have a large impact in a few sectors, and virtually no impact in others beyond the perceived valuation halo effect. Some had anticipated the price for HD Supply might cool slightly due to the weakness of residential markets in North America. ...

Be careful not to get a sugar high from the HD Supply spin-off announced this past week. After a deal of this magnitude, it’s easy to get excited about what it means once the dust settles. But the dust won’t settle on HD Supply. If anything, the non-contributing or distracting units will be shed and a leaner, more focused business will emerge. It was not purchased to be gutted or dismantled. The remaining entity, while smaller in size, will likely continue as the lead consolidator in a narrower band of distribution verticals.

The deal will have a large impact in a few sectors, and virtually no impact in others beyond the perceived valuation halo effect. Some had anticipated the price for HD Supply might cool slightly due to the weakness of residential markets in North America. The estimated 12X EBITDA valuation of this deal means the bar is high for blockbuster deals. It’s a seller’s market because of the flood of private equity buyers.

But it would be a mistake to extrapolate the valuation of a distributor with $12 billion in annual revenues to a company with $12 million in annual revenues. As MDM’s audio conference speakers noted in May and June, valuations at smaller companies have been about half of the Hughes Supply and HD Supply deals.

A popular pastime for pundits in this industry has been to ponder whether some distributor might be able to scale into a $50-billion international entity. A possibility on paper perhaps, but it goes against the grain of history. It’s a daunting task to scale up a diverse portfolio of product distribution, gain synergy and deliver the high levels of local customer service that define the core value of distribution. At the same time, it’s dangerous to point a finger at the deal last week and say it proves that HD Supply has been a failure.

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