Modern Distribution Management / Vol

VOL. 37, NO. 12 MODERN DISTRIBUTION JUNE 25, 2007 The Newsletter for the MANAGEMENT Wholesale Distribution Channel Home Depot Sells Off Supply Unit INSIDE New owners committed to acquisition strategy After months of speculation, The Home Depot assets after taking full ownership. The new Know Your has agreed to sell its wholesale division, HD owners however do plan to continue build- Customers Supply, and bring its focus back to the perfor- ing the company through acquisitions. mance of its retail core. Three private equity “That we will certainly do,” Novak said. Interline Brands looks firms will buy the $12 billion unit. “Local scale is very important for produc- to grab bigger share of tivity and service levels.” customers’ wallets. By Lindsay Young That means that HD Supply, with $12 Page 4 billion in sales in 2006, will continue as The Home Depot, Atlanta, GA, has agreed a major player in the distribution M&A The Gray Market to sell HD Supply to a team of private market. and Distribution equity firms – Bain Capital LLC, Carlyle A look at a recent lawsuit Group and Clayton Dubilier & Rice Inc. History – for $10.3 billion, or roughly 10X-12X Little more than a month after former CEO between a supplier and a EBITDA. The firms are splitting the invest- Robert Nardelli retired, HD announced in distributor. ment equally. February it would consider a potential HD Page 5 The sale has been expected for weeks Supply spin-off. Nardelli had pushed the now, with a number of private equity wholesale division as a way to diversify Suppliers Fight firms rumored to have bid for the unit and HD’s offering and spark growth to balance Counterfeiting several to have bowed out due to the down out a slowing retail division. Schneider Electric bars 3 housing market – one of HD Supply’s core While HD had reported that some companies from selling customer bases. HD Supply reported a de- investors wanted it to stick with its HD product; nail producers crease in organic sales in the recent quarter. Supply strategy, other investors were quite target dumping practices. “This was not an easy decision,” HD vocal on their dissatisfaction with the Page 7 CEO Frank Blake said. “(HD Supply chief) wholesale business. They called it an un- Joe DeAngelo and his team have built a necessary diversion from the retailer’s core Grainger at a world-class operation over the last few business. This included Ralph Whitworth, Glance years. We gave careful consideration to a an activist investor whose firm, Relational number of options, including holding onto Investors, recently won a seat on HD’s Sales by product category the business.” board of directors. and customer segment Blake said that selling HD Supply in Home Depot has spent the past few for $6B distributor. pieces, as some industry-watchers expect- years building up its wholesale unit, which Page 3 of Industrial & ed, would have been “timely and distract- originated back in the mid-1990s. It bought Construction Markets ing,” with the added cost of separating the $5.5 billion diversified distributor Hughes Update businesses. An IPO, another option con- Supply for $3.4 billion, or 12X EBITDA, in sidered, would have resulted in a multiple early 2006, and National Waterworks, at discount relative to the sale of the entire the time with $1.5 billion in annual sales, business. for $1.35 billion in mid-2005. Industry-watchers say HD Supply’s In 2004, Home Depot acquired White new owners will likely sell off some of HD Cap Construction Supply, then a $500 mil- Supply’s assets almost immediately in an lion distributor. effort to better integrate the wholesale unit The year 2005 started an acquisition under a common platform. frenzy, which included $400 million Wil- CD&R’s David Novak said that it liam Bros. Lumber, Contractors’ Ware- ® is premature to say whether the private house, the $100 million Greenwald Supply equity team will divest any of HD Supply’s continued on next page mdm Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com ® mdm MODERN DISTRIBUTION MANAGEMENT / VOL. 37, NO. 12 / JUNE 25, 2007 Inc. and Greenwald Industrial Products Com- Impact on M&A Market pany, fastener and industrial supplies distribu- In a recent MDM audio conference, Jim Miller, tor Brafasco, and catalog MRO supplier Utility who heads the distribution practice at invest- Supply of America Inc. ment banking firm Vetus Partners, said that Crown Bolt Inc., a distributor of fasteners even talk of a potential HD Supply spin-off had and hardware, was acquired in 2005, as well – its a slight impact on valuations in the distribution primary customer is Home Depot. Blake con- M&A marketplace. firmed that Crown Bolt was included in the sale The effect of talk of a divestment came from of HD Supply. Home Depot has signed a seven- two areas: “One, the position of Home Depot as year supply agreement from Crown Bolt. a competitive buyer against another bidder, or In 2006, HD Supply made almost $4 billion at least the perceived threat of Home Depot as a in acquisitions, starting with the Hughes buy. competitive buyer,” Miller said. Its other acquisitions in the past year were quite “And two, Home Depot Supply as a poten- diverse, including distributors in waterworks, tial exit opportunity. There were several private electrical, concrete and utilities. equity funds that were chasing distribution “Home Depot has finally faced the inevi- investments with the intent of buying them, table truth they could not run the collection holding them for a period of time and poten- of companies they acquired over the past five tially flipping them to HD Supply.” years,” said Adam Fein, president of Pembroke The firms likely will pay closer to 12X Consulting. “The private equity firms taking EBITDA for HD Supply, according to Miller. over have the opportunity to build a unified “When they started this process, I believe they common platform. But to do that, they will prob- were touting approximately $1 billion of EBIT- ably divest some of the companies that are a part DA from HD Supply. With the recent softening of HD Supply.” of some of their end markets, particularly the In mid-May, Grainger President Jim Ryan residential end market, I’m guessing that HD told analysts that the new owners will have Supply’s most recent trailing 12 months’ EBIT- the same challenges in unifying HD Supply’s DA was closer to $800 million than it was to $1 diverse businesses. “The challenges in building billion. the HD Supply business exist regardless of who “That’s a full purchase price, but I still be- owns them … It takes time, patience and a lot of lieve that CD&R (and the other firms) are getting money. That said, it can be done. But a change in a good collection of assets and the investment ownership doesn’t change any of this.” will be a good one over time.” Miller said that the final sale price of $10.3 billion is a “good sign” for distributors contem- MODERN Contact Information DISTRIBUTION Questions, comments, article proposals, address changes MDM Editorial Advisory Board MANAGEMENT or subscription service to: David K. Barth Founded in 1967 Gale Media, Inc. Member of the Board of Directors of the by J. Van Ness Philip 2737 Mapleton Avenue, #201, Boulder, CO 80304 Tel: 303-443-5060 Fax: 303-443-5059 Industrial Distribution Group Website: http://www.mdm.com Publisher Kevin Boyle Subscription Rates Thomas P. Gale Vice President Industrial Distribution and Channel [email protected] To subscribe to Modern Distribution Management, please call 303-443-5060, email [email protected] or http://www.mdm.com. Management for the Loctite Industrial Division of Editor Henkel Technologies Lindsay Young Subscriptions are available by online delivery and/or first-class mail. [email protected] Three-year archives of MDM are available online to subscribers. Previous-year archives are available at a Larry Goode Marketing Director discounted rate to current subscribers. CEO of RT Dygert International, Inc. Kim Sorensen [email protected] Published twice monthly; $345/yr., $365 U.S. funds other Julia Klein countries; $169 each additional subscription to a company ($189 other countries). For group subscription rates and site licenses, President and CEO of C.H. Briggs Hardware Co. please contact Tom Gale at 303-443-5060. Stuart Mechlin Copyright © 2007 by Gale Media, Inc. All rights reserved. Modern Vice President, Industrial Supply Division of Distribution Management® and mdm® are registered trademarks of Gale Media, Inc. Material may not be reproduced in whole or in part Affiliated Distributors in any form whatsoever without permission from the publisher. To request permission to copy, republish, or quote material, please call Walter W. Norton Jr. 303-443-5060. President and COO of Norton Electric Wholesale ISSN 0544-6538 Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com ® MODERN DISTRIBUTION MANAGEMENT / VOL. 37, NO. 12 / JUNE 25, 2007 mdm 3 plating selling part or all of their businesses. end markets insulated from global competition, Some industry-watchers expected the price to be such as facilities maintenance, construction, or closer to 8X EBITDA.

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