Home Depot to sell supply unit, buy back stock
Home improvement retailer Home Depot Inc. said Tuesday that it would repurchase $22.5 billion in stock and sell its supply division to three private equity firms for $10.3 billion as it refocuses on its core retail business.
The sale of HD Supply to Bain Capital Partners, Carlyle Group and Clayton, Dubilier & Rice unloads a business built up by the home improvement retailer’s former chief executive.
Shares of Home Depot rose $2, or 5.2%, to $40.27 in after-hours trading on news the company would repurchase $22.5 billion in stock, or nearly one-third its total market capitalization of $74.9 billion, “as soon as practical.”
The stock buyback will be funded from proceeds from the sale of HD Supply, existing cash and new debt, the company said.
Shares of Atlanta-based Home Depot have fallen about 3.5% this year as growth in its core retail business slowed amid the weakening U.S. housing market and increased competition with smaller retail rival Lowe’s Cos.
“We believe Home Depot’s future financial policy will continue to be more shareholder-friendly given goals of using excess liquidity to repurchase shares and create value for shareholders,” Standard & Poor’s credit analyst Stella Kapur said.
“While we view Home Depot as having a strong business profile ... we also do not foresee a quick turnaround in the housing market,” Kapur said. S&P; said it could cut Home Depot’s credit rating after the sale of HD Supply.
HD Supply, which sells building materials, waste water and utility products to municipalities and contractors, was put up for sale this year with investment bank Lehman Bros. overseeing the auction. HD Supply had 2006 revenue of more than $12 billion.
The unit, which accounts for 13% of Home Depot’s sales and 8% of its operating profit, was launched in 1997. Former Home Depot CEO Robert Nardelli boosted it in recent years by buying companies such as water and sewer products supplier National Waterworks Holdings in 2005.
Last year, Home Depot expanded HD Supply with the $3.2-billion acquisition of Hughes Supply, the retailer’s biggest purchase.
Some Wall Street observers saw the lower-margin supply business as a diversion from Home Depot’s core retail stores.
Frank Blake, named to Home Depot’s top job this year when Nardelli resigned amid an uproar over his compensation, said the retailer would consider strategic options for the supply business and invest more money in the retail stores to win back market share.
The chain is increasing capital spending 29% this year to maintain stores, recruit skilled staffers and upgrade its merchandise.
