HD Supply Becomes a Good Buy?

Home Depot announced that it “is in discussions with affiliates of Bain Capital Partners, The Carlyle Group and Clayton, Dubilier & Rice for the purpose of restructuring the previously announced agreement for the sale of HD Supply. These discussions could result, among other things, in material changes to the terms and financing of the transaction, including a reduction in the $10.325 billion purchase price.”

Presumably this is in recognition of the continued deterioration of the residential market and recognition that the residential market will be depressed for awhile, and recognizes that HD Supply’s acquisitions were very residentially-oriented. But there could be a silver lining to the re-negotiation. By acquiring a company with potentially a good infrastructure, and the resources to further diversify the business that the company pursues, the private equity acquirers could be purchasing an asset at a reduced valuation which will enable them to gain a higher long-term return.

Once the deal is done, look for continued operational enhancements (like the recent new RDC in Florida), a focus on private label products (probably in plumbing and other markets to help improve residential profitability) and a focus to diversify its customer segments – building upon its infrastructure and maintenance groups and then seeking commercial acquisitions for its construction business.