Home Depot Should Keep Its Supply Operation

By Douglas A. McIntyre Published Aug 26, 11:17AM EDT

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Home Depot (HD) seems desperate to get rid of its HD Supply unit which handles wholesaling of its products to builders. The deal was set for private equity interests Bain Capital, Carlyle and Clayton Dubilier & Rice to buy the firm for $10.3 billion. According to the last HD 10-Q, the Home Supply business had revenue of $3.1 billion and operating income of $163 million.

Due to trouble getting banks and big institutions to put up loans for the buy-out, the private equity purchasers have asked for a lower price. And, HD seems to be willing to bring the sticker down to about $9 billion.

Now the FT writes, HD is willing to go even further to cut loose the operation–"According to people familiar with the matter, a range of solutions are possible, including the possibility that Home Depot might agree to shoulder some of the debt needed to fund the deal."

HD was hoping to use the proceeds from the sale to, among other things, have a huge share buy-back. But, why bother? The housing slump will keep the company’s shares low no matter what it does.

The operating margins at the Supply group were over 5%, according to the HD quarterly filing. HD’s retail operation had a 9% margin. If private equity interests believe that they can improve the operating performance of the Supply business, why shouldn’t Home Depot management think the same?

Home Depot would be better off improving its share price by managing through the current environment instead of selling a business that could have strategic value, especially when the housing slump begins to ease. The parent company has $11 billion in debt. But, it has an operating income run rate of $2 billion a year. If it fell the need to buy-back shares, it can clearly take on more debt.

At its current share price of $34.50, HD trades at .75x sales. It is willing to sell the Supply unit for .72x sales if the price is $9 billion. If it guarantees debt, the deal is even worse.

HD should hang onto it Supply unit. Selling it under the current terms does not make sense.

Douglas A. McIntyre

About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.