Home Depot Considers sale of supply business

ReutersMonday, February 12, 2007; 2:41 PM
ATLANTA (Reuters) - Home Depot Inc. (HD.N) said on Monday it was considering a sale, spin-off or initial public offering of its professional supply business to focus on its retail stores, reversing a controversial policy of former CEO Robert Nardelli to expand the unit.
Wall Street has criticized the wholesale distribution unit with its lower profit margins, saying it diverted resources from retail stores as competition from Lowe's Cos. (LOW.N) intensified. Home Depot Supply accounts for some 15 percent of the company's total sales, while retail stores account for 85 percent of revenue.
Partnership

Home Depot Supply sells building materials, wastewater and utility products to municipalities and contractors in the United States and Canada.
"With annual revenues of approximately $12 billion, HD Supply is a healthy, growing and vibrant business," CEO Frank Blake said in a statement. "We are undertaking this evaluation to determine whether there are strategic alternatives with respect to HD Supply that would optimize shareholder value."
The company said it has retained Lehman Brothers as its financial advisor to assist in the process.
Home Depot launched the supply business in 1997 and grew it by acquiring companies like National Waterworks Holdings, a water and sewer products supplier. The unit continued to expand under Nardelli, who joined the company in 2000, and last year the company bought Hughes Supply for $3.2 billion.
Home Depot has been under intense pressure from investors because of weakening sales and profits. It also faces a regulatory probe into its stock options award practices.
Nardelli earned at least $119.2 million in salary and bonus, not including options, through the end of fiscal 2005. When he stepped down as chairman and chief executive in January, it was with a severance deal of about $210 million.
When Nardelli resigned, the retailer said it was by mutual decision between him and the board. He was replaced as chairman and chief executive by Frank Blake.
"You have a new regime in place, and it's trying to put its mark on where the growth of the company really sits," said Bill Schultz, chief investment officer for McQueen, Ball & Associates, which owns Home Depot stock.
Blake is "trying to cut expenses and trying to change the culture a little bit," Schultz said.
Sales growth at Home Depot's stores has cooled over the past year as the U.S. housing market slowed. Sales at stores open at least a year fell 5.1 percent in the third quarter, and in November it said it expected a 4 to 5 percent rise in earnings per share for its 2006 year, down from a previous forecast of growth at the low end of 10 to 14 percent.
Analysts have said Blake, a former General Electric executive, is taking a more inclusive and conciliatory approach to shareholders and employees than Nardelli.
"The company is refocused on retail, seems determined to listen to its major shareholders, and will likely use the $10 billion in proceeds to buy back more stock," Credit Suisse analyst Gary Balter said in a research note
Last week, Home Depot gave a seat on its board to Relational Investors, an activist shareholder that had announced plans to nominate at least two directors to the retailer's board this year. The decision to add Relational principal David Batchelder to the Home Depot board ended the firm's threatened proxy fight.
In a research note, Sanford Bernstein analyst Colin McGranahan said a potential buyer of Home Depot Supply could include Wolseley PLC (WOS.L), a British building materials supplier, and private equity firms.
Shares of Home Depot were up 46 cents, or 1.1 percent, to $41.46 on the New York Stock Exchange, while Lowe's rose 26 cents to $33.68.
Home Depot's stock is up less than one percent so far this year.

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