The 2020 Mid-Year Economic Update_long

Home Depot to Buy Hughes Supply

trying to figure out who is next,” he said. He said that Home Depot already has a strong position in the construction market, so it may try to further push into the industrial MRO market.


Hughes Supply stock was up about 18% at the end of trading the day the acquisition was announced.


The Home Depot said it will fund the acquisition with a combination of cash on hand and access to debt capital markets through the company’s $4 billion shelf registration, and that the deal will be accretive to earnings per share within its first year. The acquisition is expected to close as soon as possible pending appropriate shareholder and regulatory approvals.


After months of speculation, The Home Depot announced it would pay $3.2 billion for industrial distributor Hughes Supply Inc., Orlando, FL, and assume $285 million in net debt. The purchase price is around 12X EBITDA. The addition of Hughes Supply more than doubles the size of The Home Depot Supply Division with projected 2006 combined sales approaching $12 billion.


The move by Home Depot pushes the big-box retailer further into traditional industrial wholesale markets.


“It just tells us that Home Depot is really highly motivated to get into the industrial distribution market,” said David Manthey, senior distribution analyst who follows Hughes for Robert W. Baird & Company Inc., Milwaukee, WI. “Hughes was the only cornerstone property that was out there.”


Michael Marks, principal partner in Indian River Consulting Group, is excited about the acquisition because of the attention it brings to wholesale distribution companies. “(The Home Depot) recognizes the value of the wholesaler,” he says. “It’s going to attract more investment into the channel.”


Marks says the publicity is especially good for distributors who want to sell or consolidate.


Hughes Supply is a $4.4 billion distributor of construction, repair and maintenance-related products. The company has recently seen record sales; its revenues grew nearly 30% in the third quarter fiscal year 2006. The growth has been driven by sales across the board, but especially in the water and sewer, utilities, and MRO businesses.


Acquiring Hughes Supply fits with Home Depot’s strategic mandate to expand beyond retail in the U.S. It allows Home Depot to get into a lot of different areas at the same time, as opposed to continuing along its path of building a patchwork of smaller companies, Manthey said.


“We continue to execute our growth strategy laid out five years ago to enhance our core retail business, extend our business into adjacent areas and expand into new markets,” Home Depot CEO Bob Nardelli said in a press release. “As part of our expansion strategy, The Home Depot and Hughes Supply are an ideal strategic and operational fit for each other.”


Hughes has 500 locations in 40 states, and will contribute new platforms to The Home Depot Supply portfolio and add to current ones including water works, professional construction supply and multi-family maintenance.


“Home Depot Supply is well-positioned in the marketplace and possesses a wealth of resources to thrive in an industry where there are tremendous opportunities for growth,” Hughes President and CEO Tom Morgan said in a press release. “This combination is positive for all of our constituents.”


Before the Hughes acquisition, The Home Depot Supply’s largest buy was National Waterworks, a $1.4 billion distributor of products used to build, repair and maintain water and sewer systems. It also recently bought White Cap Construction Supply, a $500 million distributor of specialty hardware, tools and materials to contractors. Williams Bros. Lumber, with $400 million in annual revenues, was also snatched up by HD.


Home Depot’s supply business has grown to comprise about 5 percent of Home Depot’s total revenues, or roughly $3.6 billion of its $73 billion in 2004 revenues. Most recently, about one fourth nearly a full percentage point of the company’s 3.6 percent same-store sales growth in the third quarter came from the supply business.


Consultant Bruce Merrifield said he was watching closely to see how The Home Depot would manage Hughes’ diversified offerings. “It looks like a very expensive, ambitious effort for Home Depot at the crust of the housing bubble,” Merrifield said. Housing starts are expected to slow in the next year and return to the healthier levels seen in 2004.


Manthey said the wholesale distribution industry is anticipating The Home Depot’s next move. “Most people are

About the Author
Leave a Reply

Leave a Comment

Sign Up for the MDM Update Newsletter

The MDM update newsletter is your best source for news and trends in the wholesale distribution industry.

By subscribing, you are agreeing to MDM’s Privacy Policy.

2

articles left

Want more Premium content from MDM?

Subscribe today and get:

  • New issues twice each month
  • Unlimited access to mdm.com, including 10+ years of archived data
  • Current trends analysis, market data and economic updates
  • Discounts on select store products and events

0

articles left

This is your last free article

Subscribe to MDM Premium today and get:

  • Unlimited access to MDM.com
  • 1 year digital subscription, with new issues twice a month
  • Trends analysis, market data and quarterly economic updates
  • Deals on select store products and events

1

article
left

You have one free article remaining

Subscribe to MDM Premium to get unlimited access. Your subscription includes:

  • Two new issues a month
  • Access to 10+ years of archived data on mdm.com
  • Quarterly economic updates, trends analysis and market data
  • Store and event discounts

To continue reading, you must be an MDM Premium subscriber.