Retail

Return to Article

Home Depot Sets Big Buyback

Rob Lenihan

Home Depot (HD Quote) confirmed that it will sell its wholesale-distribution division to three private-equity firms, and the retailer said it will use cash from the sale to help fund a massive share buyback.

Shares were climbing $2.17, or 5.8%, to $40.44 in after hours trading.

The Atlanta-based home-improvement giant said Tuesday it will sell its HD Supply business to private-equity firms Bain Capital, Carlyle Group and Clayton, Dubilier & Rice for $10.3 billion. The company had been seeking to sell the supply division since earlier this year as it looks to repair its sagging retail business.

With the deal in place, Home Depot said it plans to repurchase $22.5 billion in shares as soon as possible, using money from the sale, cash on hand and proceeds from the issuance of $12 billion in notes.

The $22.5 billion share repurchase may be in the form of a tender offer, open market repurchases or accelerated share repurchases, the details of which will be announced at a later date, the company said.

Home Depot has about 1.97 billion shares outstanding. The stock closed Tuesday at $38.27, up 31 cents.

A $22.5 billion buyback at that price would represent about 587.9 million shares, or roughly 30% of Home Depot's outstanding stock.

"Our planned recapitalization is transformational for our company," said Chief Financial Officer Carol Tome. "While we continue to invest heavily in the five priorities focused on our core retail business, this recapitalization plan allows us to return significant capital to our shareholders, improve the efficiency of our balance sheet by lowering our cost of capital, while at the same time retaining strong financial and operational flexibility."

The move to sell the supply business is one of CEO Frank Blake's first major overhauls since taking the reins at the beginning of the year. His predecessor, Bob Nardelli, was a proponent of bulking up Home Depot's nonretail operations, and he doubled the size of the business with the 2006 purchase of Hughes Supply.

"Today's decision reflects our continued commitment to enhancing shareholder value, through an exclusive focus on our retail business and the return of cash to our shareholders," said Blake. "This year alone we will spend over $2 billion in support of our top five retail priorities. We are confident in the ability to improve productivity in our retail business through investment in these priorities, which will further enhance returns on invested capital as the investments take hold."

Home Depot has been battling a sales and profit slump that has lasted more than a year, as it has been hit by competition from the likes of Lowe's(LOW Quote) and weaker demand due to the U.S. housing downturn.

Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates, said the sale was a smart move.

"I think the acquisition was wrong-headed," he says. "They took their eye off the ball. They've got to reinvest in the store base. If they don't get these stores right, they've got no business."