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What’s HD Supply’s Next M&A Move?

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With all the cash that HD Supply Holdings Inc. is about to collect in exchange for its Construction & Industrial – White Cap division, it’s no wonder that one of the burning questions for the Atlanta-based company revolves around with whom and when will the company replace its latest portfolio departure.

After all, $2.5 billion goes a long way in this industry, and there are plenty of distributors who would welcome a seasoned operator like HD Supply to make an offer on their business.

And while it’s too soon to say if that large chunk of change is already burning a hole in HD Supply’s pocket, company executives haven’t hidden their desire to use the proceeds from the sale to fund further M&A activity.

HD Supply’s position in the marketplace, coupled with this infusion of cash, bodes well for such a large player in distribution’s fragmented markets. And that bodes well for potential acquisition targets, no matter the category.

“We view that [divestiture] as a great opportunity for us to be active in M&A going forward,” CEO Joe DeAngelo told analysts on Wednesday morning’s earnings call to discuss fiscal 2Q results. “We feel like we’re the natural acquirer, given the skill that we have, and the customer relationships that were in place. And I would say that description applies to all of the verticals that we operate in today. We feel like there is a number of different fantastic opportunities in front of us.”

While DeAngelo wouldn’t pin down any particular vertical the company is targeting, CFO Evan Levitt provided some additional color around the assets — or at least the profile of assets — that HD Supply might pursue when the time is right.

“We’re looking at acquisition opportunities within our existing channels, but we do look for opportunities to enhance our position not certainly in new channels, but with new products, or new service offerings to our existing customers to better serve them,” he said. “We also look for opportunities where we can become more integrated with our customers at workflow so that we can be more relevant to them. So, it is a wide variety of the type of acquisitions that we may be looking for.”

Levitt went on to say that one of the company’s most important criteria is “value.” With the COVID-19 crisis disrupting distributor values, there might be some real opportunities for HD Supply to strike gold.

“In general we would look to do an acquisition for a multiple lower than that which we trade at, and then look to pay down that multiple further through synergies, so we’re going to buy a company that we think we can add value to, and improve either through acceleration in growth, reduction in cost, or acceleration and enhancement of margin,” Levitt said. “We also look for reverse synergies, where is there an acquisition target that does something particularly well that either we don’t do today or don’t do this as well as we would like that we can learn from and expand that know-how across the balance of our business.”

The New-Look (for Now) HD Supply

HD Supply’s recent moves might provide some clues as to where the company goes next with M&A.

As a recap, HD Supply announced on Aug. 11 that it would sell C&I to an affiliate of the private equity firm Clayton, Dubilier & Rice (CD&R) for $2.9 billion. The company had originally planned to spin off the Construction & Industrial – White Cap business into a separate publicly traded company but decided PE was again the right path for divestiture.

“After a detailed evaluation, we determined that a sale of our White Cap business unit to Clayton, Dubilier & Rice is in the best interests of our HD Supply stockholders,” DeAngelo said at the time of the sale. “This transaction will enable the HD Supply leadership team to intensify our focus on Facilities Maintenance, while also returning capital to our HD Supply shareholders.”

Also read: “What HD Supply’s Latest Move Means for Industrial Distribution.”

M&A was another driver for the sale, he said. This move allows HD Supply to pursue other acquisition targets and bolster a portfolio that has shrunk considerably in the past seven years. HD Supply was once part of Home Depot before being sold to a consortium of private equity firms, including CD&R, in 2007. The PE firms divested their interest in HD Supply when the company went public in 2013.

In the years that followed, HD Supply began selling off parts. In 2015, it sold its Power Solutions division to Anixter International Inc. (since acquired by WESCO). And in 2017, the company sold its Waterworks division to CD&R (the company has since changed its name to Core & Main). Now this deal with White Cap.

“CD&R has reacquired roughly half the business that they divested themselves of when HD Supply went public since 2017 with the White Cap and Core & Main acquisitions,” John Gunderson, MDM VP Analytics, said last month.

HD Supply ranked No. 4 on MDM’s 2020 Market Leaders list for the Top 40 Industrial Distributors with $6.1 billion in annual revenue last year. With the loss of roughly half of its revenue after the White Cap sale (Construction & Industrial notched $3 billion last year), HD Supply is sure to drop a few spots in next year’s rankings — unless the company is quick to spend that pile of cash that’s about to hit its bank account.

Until then, its remaining Facilities Maintenance business is the “clear market leader” in that category, according to Baird analyst Dave Manthey in a note to clients Wednesday afternoon. “Following the sale of numerous other businesses (factually all) acquired by Home Depot and the most recent sale of White Cap, HDS will consist of just one core business: Facilities Maintenance,” he continued. “The company is the clear market leader but with just ~6% market share, providing ample white space for organic and inorganic share gains. We believe the company could also be a target for HD [Home Depot] or LOW [Lowe’s] following the C&I sale, with HD management previously noting a preference to retain the FM business specifically prior to the company’s sale to a private equity consortium.”

As for the earnings report, the company posted a decent fiscal second quarter. Though sales were down compared to the same period a year ago, HD Supply’s earnings per share of 83 cents (non-GAAP) and 81 cents (GAAP) beat analysts’ estimates by 11 and 10 cents, respectively, while the company’s revenue of $1.6 billion was in-line with expectations.

Editor’s note: John Gunderson was a distributor leader at HD Supply and was on the leadership transition team during the sale of the $2 billion HD Supply Power Solutions business to Anixter from 2014-2017.

The post What’s HD Supply’s Next M&A Move? appeared first on Modern Distribution Management.

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