Home Depot Sells a Unit That Never Fit on Home Services

Dec

Home Depot Sells a Unit That Never Fit

posted by admin in Home Depot

Home Depot agreed yesterday to sell its Home Depot Supply Unit to a group of private equity firms for more than $10.3 billion. Members of the consortium Bain Capital, the Carlyle Group and Clayton, Dubilier %26 Rice will take an equal stake in the company.

Home Depot also announced yesterday that its directors had authorized a $22.5 billion increase in its share repurchase program. The repurchase would be financed, Home Depot said, with the proceeds from the sale of the supply unit, cash on hand and the sale of $12 billion in unsecured notes.

Analysts had always found the supply unit a poor fit alongside the faucets and light bulbs that are Home Depots mainstays. Carol B. Tome, Home Depots chief financial officer, said yesterday that the move would allow the company to focus on its retail business, where it is being challenged by Lowes.

Ms. Tome said that the price was higher than the almost $8.5 billion that Home Depot had paid for the companies it cobbled together to create the unit.

Long expected, the sale of the unit, which provides pipes, lumber and concrete for professional builders, is the shedding of a liability from the era of Robert L. Nardelli, Home Depots former chief executive who was ousted this year. The sale is expected to close in the third quarter. Mr. Nardelli, a former General Electric executive, was criticized by investors and analysts for his inability to raise the companys stagnant share price, even as he earned $270 million for the last six years. Under Mr. Nardelli, customers had also complained that the level of service at the companys 2,000 stores had fallen.

Home Depots new chief executive, Frank Blake, has struck a more conciliatory tone and so far earned cautious praise. But as the housing slump continues to take a toll on the companys profits and individual store sales while the fortunes of Lowes have risen it will be hard-pressed to start its turnaround.

Shares of Home Depot rose slightly yesterday, by 31 cents, to $38.27, in regular trading, and rose as high as $40.55 in after-hours trading.

Mr. Nardelli originally created the supply unit in 2000, as Home Depot found itself running out of room to build stores. The goal was to both expand the retailers reach and to achieve cost savings through synergies, like buying wood in bulk for both its supply and retail divisions.

Yet Home Depot Supplys profit margins never reached the level of the retail side, and the cost savings never came as quickly as executives had hoped. The unit accounted for 13 percent of companys sales and 8 percent of its operating profit.

This year senior executives determined that integrating Home Depot Supply into the rest of the company would be too costly and distracting. Home Depot hired Lehman Brothers to evaluate options for the unit, including whether to sell it or spin it off.

Patricia Edwards, a money manager with Wentworth, Hauser %26 Violich, which owns Home Depot shares, said that the supply unit was a distraction because company executives needed to focus on improving the performance of the chains 2,000 stores.

The sale, Ms. Edwards said, allows management to focus where the needs are and allows them to return to their roots.

Merrill Lynch, J. P. Morgan Securities and Citigroup Global Markets acted as acquisition advisers to the equity firms and Debevoise %26 Plimpton served as legal counsel. Lehman Brothers advised Home Depot and Wachtell, Lipton, Rosen %26 Katz served as the companys legal adviser.