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.