Home Depot focuses on retail experience

The Home Depot's sale of its wholesale distribution business and its plans to buy back another $22.5 billion in stock may heighten hope for investors who were frustrated by most of former CEO Bob Nardelli's six-year reign.

Five months after Nardelli resigned amid a firestorm over his hefty pay and the company's lagging stock price, the world's largest home improvement store chain further distanced itself from his strategies Tuesday when it announced the $10.3 billion sale of Home Depot Supply to three private equity firms.

Atlanta-based Home Depot also said it would buy back up to $22.5 billion of the company's shares, or more than a quarter of its current market capitalization.

"Today's decision reflects our continued commitment to enhancing shareholder value, through an exclusive focus on our retail business and the return of cash to our shareholders," said Frank Blake, who took over as CEO when Nardelli resigned in January.

The announcement sent shares of The Home Depot Inc. up $2, or 5.2 percent, in extended trading after they gained 31 cents to end the regular session at $38.27. They've traded between $32.85 and $42.01 in the past 52 weeks.

Nardelli saw Home Depot Supply, which serves contractors, homebuilders and other business customers, as an opportunity for growth at a time when the housing market was strong. But Blake decided to consider shedding the supply unit to focus on Home Depot's more than 2,000 retail stores.

"Nardelli had a bit of the GE conglomerate mentality," said Patricia Edwards, a retail analyst in Seattle for Wentworth, Hauser and Violich. But a good retail company needs a good shopping experience, and Home Depot was suffering in that area to the point that it upset shareholders and employees, she said.

The changes announced Tuesday give Home Depot shareholders a much-needed "shot in the arm" and allow the company to refocus on its retail stores at a time when it is trying to regain market share from Lowe's Cos. and the entire home-improvement sector is suffering from the current housing slump, Edwards said.

Chief Financial Officer Carol Tome said the proceeds from the sale to Bain Capital Partners, The Carlyle Group, and Clayton, Dubilier & Rice will be invested back in the retail business, including investing in existing stores and building new ones.

The company said it will also use the proceeds to fund the $22.5 billion increase in its share repurchase program. Additional funding will come from existing cash on hand and by issuing $12 billion in senior unsecured notes.

Both Standard & Poor's Ratings Services and Moody's Investors Service put Home Depot's short-term credit ratings on review for possible downgrade because of the extra debt the company will incur.

Home Depot acquired several companies in recent years to create the supply division.

In March 2006, the company completed its $3.2 billion purchase of Orlando, Fla.-based Hughes Supply Inc., a distributor of construction, repair and maintenance products. The deal, Home Depot's largest acquisition ever, doubled the size of the supply division.

When Home Depot announced in February that it was considering shedding Home Depot Supply, analysts expected the division to sell for $8 billion to $11 billion, "so they came in at the high end and got a fairly fair price," Edwards said.

The division has more than 26,000 employees, with revenues last year of $12.1 billion, or about 13 percent of Home Depot's total sales. Tome said she wasn't aware of any plans by the new owners to reduce the work force.

Clayton, Dubilier & Rice partner David Novak and Steve Zide, managing director of Bain Capital, said in interviews Tuesday that the company is very well positioned among competitors and they expect it to grow.

"We're very excited about partnering with the Home Depot supply team, giving them the opportunity to execute their own plan" as opposed to trying to fit in within the larger company structure, Zide said.

Joe D'Angelo, Home Depot's chief operating officer, will continue to lead the supply division after the acquisition, which is expected to close in the third quarter, the buyers said.
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