Lick the spoon
Sometimes I look at a deal and scratch my head. Then I remember, fool that I am, that there are business reasons and finance reasons. If deals do not make business sense, then they must make financial sense - at least to the people who are making them.
So this week, Home Depot, the giant US home-improvement supplies retailer (#1 worldwide), announced it would sell off its wholesale distribution business (HD Supply), aimed at professional contractors and home builders. The buyer is a consortium of private equity funds, including Bain, Carlyle, and Clayton, Dubilier & Rice.
The deal is for a striking $10.3 billion, which represents about an eighth of the company's market capitalization. At the same time, Home Depot announced it would buy back over $22 billion of its shares, based on the $10 billion it will get from the deal and by borrowing $12 billion. That would amount to 30% of current shares.
In some ways this makes sense. Home Depot shares have been stagnant and margins have been negative, and the announcement has already pushed them up. For a while, at least, the buyback should boost share values and buy time for the new management team. And it is true that the housing market slump has to be affecting the activity of the small contractors served by HD Supply.
But the move is a big reversal in strategy. Home Depot has paid over $8 billion to acquire 38 regional contractor supply companies over the past few years, according to a Bloomberg article. The original idea was to build a business adjacent to the retail business, one that could use much of the same expertise and infrastructure.
So there will be a short-term benefit to current stockholders. But once the buyback is discounted, Home Depot is left in the same difficult position as ever, with even fewer options. The company is still getting beaten in terms of growth and profits by rival Lowes, and the rivalry will keep prices down. It's hard to imagine nay real growth in do-it-yourself in the near future for the same reasons that contracting is down-homeowners will have less equity and thus less easy credit than in the past decade, at least into the foreseeable future. Expansion is out -Home Depot already has 2.150 (mostly massive) stores in all 50 states, plus Canada and Mexico. Almost any new location will only cannibalize existing ones, and expansion outside North America is unlikely. And Home Depot has already made radical (most think too radical) cutbacks in salaries, especially for their best sales help.
So where do they go for further growth? The HD Supply business at least had some long-term growth prospects, and the private equity firms obviously think so. But now that's gone.
But then I remember the short-term financial jockeying is the driver for this deal. Especially since the company is going into debt at a time of rising interest rates simply to buy off disgruntled current shareholders. And one of the key motives has to be the appreciation of stock and options for the principals of the company, along with the bonuses and incentives that management will get for the short-term triumph.
In the end, Home Depot management seems to be simply stirring the pot. But those who stir the pot get to lick the spoon.
It's not about the business, it's about the spoon.
11:23:12 PM 
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