Sale of HD Supply Seems Increasingly Likely

Atlanta, GA, March 2, 2007--Home Depot CEO Frank Blake insists the company hasn't decided yet whether to sell or spin off HD Supply, its wholesale supply business. But at least two teams of private-equity firms have formed to consider bids for it, and many on Wall Street are increasingly convinced of an eventual sale that could generate more than $10 billion in proceeds.

According to people familiar with the matter, the first group consists of Bain Capital, Carlyle Group and Clayton Dubilier & Rice, while the second is made up of the Blackstone Group, Kohlberg Kravis Roberts & Co., Leonard Green & Partners and the Texas Pacific Group. A third team that could consider a bid includes Thomas H Lee Partners; the buyout unit of Goldman Sachs; and CCMP, the former private-equity arm of JPMorgan Chase, according to people familiar with the matter.

The process is still in an early stage, with the first bid expected no earlier than mid-March, and the configuration of the consortia could also change, these people said.

Several analysts returning from a two-day investor conference hosted by the world's largest home-improvement retailer said they believe HD Supply will be sold. And many expect action soon, considering Home Depot's renewed focus on its retail operations.

"We think divestiture is all but certain," Robert W. Baird analyst David Manthey said.

The offering circular on HD Supply isn't out yet, but "there is interest in the asset," said JPMorgan analyst Stephen Chick in a note to clients.

He believes Home Depot Chief Operating Officer Joe DeAngelo, who oversees HD Supply, "will follow this segment when it is sold."

"The HD Supply business is in the process of being audited as a carve-out," Chick said. "It is in HD's best interest to complete the evaluation process as quickly as possible so senior management can move on with its focus on retail."

Credit Suisse analyst Gary Balter wrote in a note to clients, "Everyone in management that we talked to seemed divorced from HD Supply, which leads us to believe that a sale will happen sooner rather than later.

"We continue to expect the sale price to be at least in the $10 billion range, and quite possibly higher as the company is projecting HD Supply EBITDA (earnings before interest, taxes, depreciation and amortization) in the $1.2 billion range in 2007 and has done a very good job of integrating the businesses it has acquired to date within their respective sub businesses."

Indeed, comments by CEO Blake and others at Home Depot's first extensive meeting with investors since former CEO Bob Nardelli left in early January indicated that for Home Depot in 2007, it's all about the retail stores.

Home Depot's spending and business plans are focused on improving sales in the company's more than 2,100 stores. And comments about acquisitions or other investments in HD Supply were notably absent, Manthey said.

"In fact, both he and CFO (Carol) Tome noted later that, 'acquisitions outside of the core retail business are not a priority,' " Manthey said.

Management's comments about HD Supply during the investor conference generally referred to releasing shareholder value, implying that potential value is currently trapped in HD Supply, the analyst said.

In addition, Home Depot appears to be eyeing all of its retail formats and business operations with the retail business in mind.

During a news conference Wednesday, Blake repeatedly said no decision has been made on HD Supply and he wouldn't speculate on the chances of any one option for the unit.

But he reiterated several times that 2007 will be a year of focus, simplification and investment to stop market-share losses and regain momentum at retail.

For example, Blake said he shifted Home Depot's e-commerce operations organizationally from a standalone business unit to the company's merchandising group to make sure merchants have the final say of which is the best distribution channel for each product. Similarly, the company recently announced it will close its standalone flooring stores because they weren't providing much of a benefit to the main stores, he said. And Home Depot is reviewing its Landscape Supply stores in the same light, he said.

"The process is pretty consistent across what we're doing," Blake said. "We've got a retail business; we are a retailer; what we've got to do is be focused on that retail business."