HD Supply inked a deal to sell its HVAC operations to Watsco Inc., in its second divestment since a trio of private equity firms bought it for $8.5 billion.

Watsco senior vice president Barry Logan tells INDUSTRIAL DISTRIBUTION the Coconut Grove, Fla.-based HVAC distributor signed a non-binding letter of intent to acquire the HD Supply branches that sell the Rheem line of HVAC products, primarily in the Southeast.

“We're in the process of doing our due diligence,” Logan said in December, adding that the proposed deal does not include any portion of HD Supply's plumbing operations. Watsco also bought ACR Group Inc. in July for $110 million.

The HVAC operation is the second business Orlando-based HD Supply decided to shed, after it agreed to sell its lumber and building materials division to Denver-based building materials distributor Pro-Build Holdings Nov. 30.

A trio of private equity firms paid $8.5 billion for HD Supply in August. At the time, the new owners said they intended to continue to pursue acquisitions, but the downturn in the residential construction market likely caused them to reevaluate their plans, says Jonathan Skelly of PCE Investment Bankers.

“The sale of their lumber business was a natural,” Skelly notes. “The business is just not profitable the way it used to be, so my sense is that they were cutting their losses. Lumber pricing has decreased quite sharply since they acquired those businesses. … I think HVAC is a very similar scenario. It's a more regional business for the company. They do not have a national presence in HVAC.”

Skelly says HD Supply's new owners are likely to examine other businesses in the same light.

“I think they're going to pursue a very similar type of analysis, [of] their electrical business, for example,” he says, adding that, like the lumber and HVAC operations, that unit is a very regional operation.

“They're probably examining that business and saying, 'Are we going to grow it and be national, competing with Rexel and Sonepar, or view this as a business we're going to get out of?'” Skelly notes. “They have to make decisions on where they want to be. Their waterworks, construction supply, electric utility and MRO [units], those are all national platform businesses for them where they have a strong presence across most of the country. Those are businesses where I think they'll try to drive value.”

HD Supply ranked second on ID's 2007 Big 50 list of distributors, with sales of $12.1 billion last year.