Home Depot buys Hughes Supply

Staff -- Industrial Distribution, 2/1/2006 7:00:00 AM

The Home Depot announced in January plans to purchase publicly traded Hughes Supply in a deal worth $3.47 billion, including the payment of $46.50 per outstanding share and the assumption of $285 million in net debt.

The deal had been the subject of speculation for months throughout the distribution industry, and will more than double the size of Home Depot's Home Depot Supply division, which serves professional contractors, municipalities and maintenance professionals. The company projects combined 2006 sales approaching $12 billion.

The acquisition is in line with Home Depot's plan to expand beyond its core retail business, and came as no surprise to industry watchers.

"The deal was rumored for quite a while. In fact, we didn't even do a double take when it was finally announced," said Michael Greenwald, equity research analyst with BB&T, in discussing the sale.

"There are three reasons a company like Home Depot acquires a company," said Mark Dancer, vice president and principal with Pembroke Consulting in Chicago. "One is for growth. Large public companies are driven by Wall Street and need to deliver growth. The second is that a Home Depot has a strategy of seeing as much of the home business as they can. Their stores only deliver a certain customer segment. So, buying Hughes gives them access to other customers.

"And third, the large retailers all look for ways to cooperate across their channels. This can mean putting products into a Home Depot store that hadn't been there before."

Dancer drew a comparison between the Home Depot acquisition of Hughes and Best Buy's purchase late last year of Pacific Sales Kitchen and Bath Centers. The deal gave Best Buy access to a new line of potential customers in the kitchen/housewares/bathroom markets.

"I think there's a very good fit between the two organizations," said Marshall Jones, president of Marco Supply and former president of the Specialty Tools & Fasteners Distributors Assn. "Hughes has done an excellent job of building their business, especially over the last 10 years or so. They've become quite the player in many facets of industrial distribution, such as in electrical supply, plumbing, water works, concrete accessories. They are exactly the type of company that Home Depot needs if they are going to penetrate more deeply into the professional market."

Milwaukee-based Baird Equity Research issued a report on the sale on Jan. 11. In it, authors David Manthey and Daniel Leben said they expect the sale to meet regulatory approval, but anticipated that the approval might be delayed. Earlier, Home Dept had acquired National Waterworks, a water and sewer business, and that might overlap or conflict with some of Hughes' business in other markets, they speculated.

Manthey and Leben were restrained in their overall enthusiasm, citing a few possible concerns. For example, Hughes sells various products to the commercial construction industry—an industry where many speculate that the profits of recent years may be leveling off.

"I think the biggest loser here could possibly be someone like Wesco, which is a direct competitor of Hughes," Greenwald said. "Home Depot could use its weight and squeeze out Wesco on the pricing front. Because Home Depot is such a large player, they could also squeeze suppliers a little bit more."

Some observers are concerned that such acquisitions cast into doubt the future of the so-called "mid-sized" distributor. Will it eventually be the super sized versus the small, niche companies? Jones doesn't think so.

"I'm pretty optimistic that there will be a vibrant mix in all categories. There'll still be large ones that will be able to stay independent of the mega ones," Jones said. "There will also be a space for the guys who are the $25 [million] to $30 million companies. ...There will be a tremendous opportunity for the small guys, the ones who can be very nimble and react to the customers' needs and give them a unique level of service.

"[Marco Supply] has been put 'out of business' three or four times already, according to the 'experts,'" he laughed. "So I have a feeling we'll probably be around."

Greenwald said he had already heard rumors that Home Depot might be acquiring other companies, something that Dancer expects as well, adding that this would be consistent with how Home Depot operated in recent years.

"Other distributors may want to watch this very closely, as Home Depot does have a history of following up acquisitions with more [acquisitions]," Dancer said.

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