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Home Depot agrees to sell supply division

The Home Depot Inc. announced Tuesday it will sell its wholesale distribution business to a group of private equity firms for $10.3 billion over the objection of some shareholders.
/ Source: The Associated Press

The Home Depot Inc. announced Tuesday it will sell its wholesale distribution business to a group of private equity firms for $10.3 billion over the objection of some shareholders.

The board of the world’s largest home improvement store chain approved the sale of Home Depot Supply to Bain Capital Partners, The Carlyle Group, and Clayton, Dubilier & Rice. The sale is expected to close later this year.

The board also authorized a $22.5 billion increase in the company’s share repurchase program.

“Today’s decision reflects our continued commitment to enhancing shareholder value, through an exclusive focus on our retail business and the return of cash to our shareholders,” Chief Executive Frank Blake said in a statement.

Atlanta-based Home Depot said Feb. 12 it was considering shedding Home Depot Supply as it focuses on its core retail business. The supply unit serves contractors, homebuilders and other business customers.

“We as a company are solely focused on retail,” Chief Financial Officer Carol Tome said Tuesday, adding that proceeds from the sale will be invested back in the retail business, including investing in existing stores and building new ones.

At the company’s annual meeting last month, some shareholders prodded the company to keep the unit, Blake told reporters after the meeting.

The division has more than 26,000 employees, with revenues of $12.1 billion in 2006. The bulk of its operations are in Orlando, Fla.

Tome said she wasn’t aware of any plans by the new owners to reduce the work force.

Clayton, Dubilier & Rice partner David Novak and Steve Zide, managing director of Bain Capital, said in interviews Tuesday that the company is very well positioned among competitors and they expect it to grow.

“We think it’s a wonderful opportunity to take a business that was not the core focus of Home Depot and drive the transformation of this business independently in a focused way,” Novak said.

In recent years, Home Depot has acquired several companies to create the supply division.

Just last year, Home Depot completed its $3.2 billion purchase of Orlando-based Hughes Supply Inc., a distributor of construction, repair and maintenance products.

The deal, Home Depot’s largest acquisition ever, doubled the size of the supply division, which was seen by then Chief Executive Bob Nardelli as a big opportunity for growth.

When Blake became chief executive this year, he decided to review the division and consider a sale or other alternatives, further distancing the company from the strategies advanced by Nardelli.

Nardelli resigned in January after six years as CEO amid a firestorm over his hefty pay and the company’s lagging stock price. He had said repeatedly that he believed the company’s strategy under his watch did not need changing.

Some analysts said then the decision to sell the supply unit could benefit the company by allowing it to focus on generating value for shareholders, while others suggested it could put the onus back on the company’s retail side, where it faces tough competition from Lowe’s Cos.

“Importantly we believe the strategic benefit of the sale is greater than the dollar value the company will realize,” David Strasser, an analyst with Banc of America Securities, said in a research note written Friday, when media reports of a sale surfaced.

Patricia Edwards, a retail analyst in Seattle for Wentworth, Hauser and Violich, said Home Depot is getting a fair price — and an opportunity to keep shareholders happy. By fixing the retail side, the company can better face the larger slump in the home-improvement sector due to the slowing housing market.

“They had let the retail experience slide while they were busy building this supply empire,” Edwards said. “It had gone so far downhill. ... This allows management to focus only on Home Depot retail stores.”

The company said it will fund the $22.5 billion share repurchase with the proceeds from the sale of Home Depot Supply, existing cash on hand and by issuing $12 billion in senior unsecured notes.

Both Standard & Poor’s Ratings Services and Moody’s Investors Service put Home Depot’s short-term credit ratings on review for possible downgrade because of the extra debt it will incur.

Home Depot shares gained $2.12, or 5.5 percent, to $40.39 in after-hours trading. Before the announcement, shares gained 31 cents to end the regular session at $38.27.