Home Depot moves to sell wholesale unit

BUSINESS DIGEST

February 13, 2007|By Cox News Service

ATLANTA -- Just a year after promoting its growing wholesale business as a pipeline for breakneck growth, Home Depot is considering getting rid of the unit.

The move, announced yesterday, marks yet another reversal of a course set in motion by former chief executive Robert L. Nardelli, who left Home Depot last month amid mounting criticism from shareholders. One beef has been Nardelli's expansion of HD Supply, an industrial division that caters to large commercial contractors such as homebuilders and municipalities.

New Chairman and Chief Executive Officer Francis S. Blake, in turn, has spent his first month on the job trying to calm critics with a series of moves designed to swing attention back to Home Depot's retail business.

The company said it hired Lehman Brothers Holdings to explore the options for HD Supply, including a possible sale, spinoff or initial public offering.

Colin McGranahan, an analyst with Sanford Bernstein & Co., said in a research note yesterday that the unit might fetch as much as $13 billion.

Getting rid of HD Supply would rank as one of Blake's biggest U-turns. Home Depot launched a wholesale strategy in 1997 when it began supplying apartment complexes with maintenance items, but Nardelli ramped up the effort significantly. During his six-year tenure, the company shelled out roughly $7 billion to acquire dozens of wholesale distributors, including last year's $3 billion purchase of Hughes Supply, Home Depot's biggest buy ever.

Blake, in his previous role over business development and corporate operations at Home Depot, was heavily involved in many of those acquisitions. As recently as last summer, executives likened HD Supply to a wide-open runway for growth and said that the retailer's buying spree was far from over.

Investors weren't as gung-ho, though.

Shareholder activist Ralph Whitworth, whose San Diego firm won a seat on Home Depot's board last week, criticized the wholesale unit as "strategic adventurism." He said the company should exit the business, which added about $12 billion in revenue last year but earns lower margins than the retail business.

Wholesale distribution experts have been doubtful from the start whether a big-box consumer retailer could effectively function as a middleman for other large businesses.

"Home Depot didn't really understand the wholesale distribution business very well. It's very different from retail. It's a service business based on relationships, not pricing," said Adam Fein, president of Pembroke Consulting, a Philadelphia-based firm that advises wholesale distributors.

"They essentially tried to buy customer relationships by buying all of those companies. ... But I think it finally dawned on them what a mammoth task it is to bring all of these companies together. It's a lot easier to buy them than to run them," he said.

Wall Street mildly applauded the idea of ditching the wholesale strategy, boosting Home Depot's stock 44 cents to close at $41.44.

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