Relational vs. Home Depot

It's not clear how much traction Relational, which has $6 billion in assets, will be able to gain in its proxy fight, given that it owns less than 1% of the company's stock. When the San Diego investment firm began its unsucessful battle to stop Sovereign from selling a 20% equity stake to Spain's Grupo Santander(STD), it owned 8% of Sovereign's stake.

In the end, Relational got a seat on Sovereign's board. And it got something of a moral victory, with the recent announcement that Sidhu was stepping down from the bank.

The news comes as Home Depot's shares flag and Nardelli draws increasing criticism for his well-paid stewardship of the company. The company recently put in place a huge stock buyback, prompting some observers to wonder why Home Depot wasn't putting that money into improving its widely criticized stores and customer service. The company, however, says it is spending up to $350 million in the second-half of this year on a store revitaliation plan.

The Relational offensive also comes as there has been speculation that cash-rich buyout firms may be eyeing the hardware and building supply chain. A few weeks ago, there were unsubstantiated news reports that private equity firms were considering a whopping $100 billion leverage buyout of Home Depot. The speculation was quickly refuted by the company and its managment, which put out a press release saying Home Depot wasn't for sale.

A $100 billion deal, of course, would be the biggest LBO on record. Such a deal would likely require the buyers to raise between $50 billion and $75 billion in debt to finance the deal. That's a huge sum, even in this world of easy credit. Still, the buyout speculation is an indication of investors unease with Home Depot's management.

In a letter responding to the Relational challenge, Home Depot says the investment firm's proposal may not meet the company's requirements for making a formal shareholder proposal. Home Depot says Relational may need to comply with with "the notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976'' before the proposal can be considered at the annual meeting.

Hart Scott Rodino is a law that normally governs mergers. A company spokesman declined to explain how it is relevant to Relational's proposal.

In the short-term, Relational could make life miserable for Nardelli. When the firm took on Sidhu and Sovereign it launched a massive public relations campaign and managed to get other investors to join its campaign. The centerpiece of Relational's campaign was a widely-attended investor forum in New York, where it outlined Sovereign's history of granting sweetheart deals to Sidhu and some of its directors.

Relational's effort generated a lot of bad publicity for Sovereign and did force it amend some of the more egregious aspects of the Santander deal. It probably also hastened Sidhu's departure from the bank.

If Relational takes a similar path in pressing for change at Home Depot, Nardelli & Co. could be on the hot-seat for the next few months.

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