Could a spinoff of Home Depot's HD Supply, its unit dedicated to home builders and contractors, actually be good for the building industry?
Mike Hartnett, president of Strategic Associates, Atlanta, which advises building products industry, thinks it will.
"It could be positive," said Hartnett. "We still have a relatively fragmented supply chain. Any company that can serve the big builder, and serve them well, could be a benefit not only for the builder but for the consumer. They can reduce costs all the way through the supply chain to the consumer."
HD Supply is currently a collection of acquisitions, some very large suppliers to the building trade on their own, that has yet to be formed into a unified operating group. Home Depot's focus has been put on improving results in its main retail business since the depature of its former CEO, Joe Nardelli, in January. SEE ACQUISTIONS HERE
"I think HD Supply is doing well," said Hartnett. Still, he adds, "HD Supply currently doesn't go to market with one face. They don't all go to market with the same strategy to the same customer set."
Yet, he says, HD Supply "has the ability to buy well and to distribute efficiently to the big builders."
Home Depot on February 12 announced that it was conducting a "strategic evaluation" of its HD Supply unit that could result in a spinoff or sale. Almost immediately, news reports surfaced that buyout firms including Bain Capital, Blackstone Group, Kohlberg Kravis Roberts & Co., Texas Pacific Group, Thomas H. Lee Partners and CCMP were forming up in three different groups to explore buying HD Supply.
Neither Home Depot nor HD Supply will comment on the strategic review, but Home Depot COO Joe DeAngelo told analysts at a February 28 presentation that the review "will define the best way to unleash the shareholder value associated with this premium asset."
Unleashing shareholder value is not normally associated with maintaining status quo. Thus, Wall Street expects a sale, possibly for $10 billion or more. Analysts expect DeAngelo to leave the parent company to go with HD Supply, which he now oversees, if it is sold. He told the analysts at the February 28 meeting that the unit grew sales 162% to $12.1 billion in 2006 and expected to deliver a 25% increase in operating profit in 2007 despite market conditions.
"I really believe private equity is going to pick up HD Supply," Hartnett said.