Home Depot has out-flipped and stripped private equity. A buyout consortium led by Carlyle Group acquired Home Depot’s wholesale arm for $8.5 billion just before the real estate bubble popped. On paper, the firms should recoup their HD Supply investment and then some in an upcoming initial public offering. But Home Depot fared even better.
Carlyle, Bain Capital and Clayton, Dubilier & Rice originally agreed to buy HD Supply for $10.3 billion in summer 2007. When credit markets weakened, however, Home Depot accepted a price cut while keepig a slug of the equity and guaranteeing $1 billion of HD Supply’s debt.
Both sides started out looking like chumps. The private equity owners wound up with a highly leveraged industrial distributor of pipes and tools that soon began racking up large losses amid a serious recession. Home Depot, meanwhile, deployed the sale proceeds to buy back its own shares at $37 apiece. A year later, they were worth about half as much.
A recovery turned fools into sages. If HD Supply shares debut in the middle of the desired price range, its market value will be about $4.3 billion. The stake owned by the buyout firms will be worth roughly $2.6 billion, excluding various fees earned along the way, after they injected just under $2.2 billion initially. It’s a better investment than most would have anticipated six years ago, but not a great one by private equity standards. There is still potential upside.
The U.S. home improvement chain comes out further ahead. At the same assumed valuation, its ! stake in HD Supply would be worth about $400 million. With the housing market recuperating, there’s more profit available for each Home Depot share following the buyback. And its stock is trading at about $77, twice what the company paid in 2007. That translates into an annualized return of 13 percent.
Private equity firms are equally extolled and excoriated for carving up companies and selling the pieces for a healthy return. In this case, it was Home Depot that managed the trick - and at private equity’s expense.
Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
