What the NEW HD Supply Sale Might Mean for Electrical Distributors

In a couple of words, “not much”.

HD Supply has still been sold to private equity (at a significantly reduced price). Our thoughts is that, from an electrical perspective, HD Supply is over-weighted in the residential market; has a strong utility business; will eventually seek acquisitions in different industries to diversify itself (i.e. purchase commercially-oriented distributors who may have more of a MRO/property management focus); and extend its sourcing reach to place an emphasis on private label brands (especially to support its residential business.)

What was a good acquisition for financial investors, has become better. They’ve been able to take advantage of marketplace challenges (credit, residential) and the need of a company to sell. Some of the ingredients that electrical distributors will be facing in the coming year (marketplace slowdown, lack of succession plans, need to invest technologically in the business, personnel challenges).

And while the PE firms benefit from an excellent deal, HD will retain a 12.5% investment in HD Supply…which could have greater future value than the incremental acquisition price. HD had to sell to support its stock price, its stock buy-back plan and maintain focus on its retail business (which has its own challenges).

But more importantly, electrical distributors could benefit from the acquisition lessons.

Aside from the challenges funding the deal (heavy debt that PE firms seek whereas traditional electrical distributors would probably not seek such highly leveraged acquisitions), there were other signs that something might have been amiss…

• Rumors circulated in the industry last year that HD Supply was offering 67-83% of distributor sales as an acquisition price. In an industry where the average is 28-33%, something was “wrong”. Perhaps overvaluing of assets? Could that have been why the deal was reduced by 18%?
• The company was heavily focused on the residential market. A couple of challenges…the market potential was changing (an understatement); large customer buying behaviors are changing which results in declining margins; DSO’s are increasing; and HD Supply appears to essentially be a commodity supplier (while providing services)vs. being able to support up-sell environments.

Some takeaways for your acquistion strategies…

• Know your market
• Know the going acquisition prices in the market (or your marketplace)
• Know what you are buying … and why you are buying them (what market segments are they in, what are the prospects for that market, where are your synergies, etc…)
• Conduct careful due diligence
• When presenting business plans to financial partners, help them understand the business and how you plan to utilize your expertise to grow the business and improve profitability.

If you are selling, consider how to market your business from a strategic growth opportunity viewpoint to maximize your potential. In conjunction with financial projections, this can help make your company more appealing.

If you going to get caught between a “rock and a hardplace” and need to sell, positioning the benefits of your company to potetnial acquirers is essential to maximizing your return. HD sold to financial buyers, who focus on financial returns, electrical distributors focus on building their businesses.