Value Lessons from HD Supply
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What’s the value of a $12-billion distribution roll-up of a couple dozen companies, roughly doubling in size the past two years, consisting of a highly diversified portfolio of both branch-based and catalog models, in more than half a dozen product categories?
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Rumors are floating $9-11 billion as a potential price. With HDS estimated EBITDA somewhere around $1 billion, that puts the valuation in the range of 9-11X EBITDA. Home Depot paid around 12X EBITDA for Hughes Supply a year ago. But this is definitely a seller’s market. HD may feel some Wall Street pressure to jettison the unit quickly, but it also is in the catbird seat. As reported by the Financial Times and recapped by MDM, the A-teams of private equity are prepping for the Big Show of 2007 in the world of distribution. And don’t rule out a strategic buyer participating either. There’s a lot of motivated talent to get this deal done and move on.
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Some analysts are saying Home Depot has failed and this is a repudiation of their model. I disagree. Let’s view recent events from the perspective of what the company was trying to accomplish. Home Depot, since first launching its own catalog targeted at professional contractors and other customer segments traditionally served by distributors more than ten years ago, has been methodically working its way up the contractor and customer segment food chain. It took some pick-up truck customers away from independent distributors first in the 1990s. Its path since has been to build (or buy) the infrastructure to get larger and larger customers for a lot of the same stuff they were already selling.
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Is there a potential to lose the core value of the good companies brought into this big orange tent that has lately turned into a rumor circus? Do these questions about real value really matter? After all, we are about to witness the sale and probable dismantling of the hottest property in wholesale distribution. With today’s equity markets staying hot, HD can pretty much write the deal. They’ll get a premium even for the units not performing great because the timing is about perfect to extract top dollar.
The product sector business units that make up HD Supply will likely be stronger carved into more logical pieces. Whether HD does the carving or a multi-step deal, expect a more competitive presence -a well-established, newly focused and financially-backed unit that will likely have more entrepreneurial incentives, at least for the honeymoon phase.
