Updated from 8 a.m.

Activist fund Relational Investors is taking on Home Depot ( HD).

The San Diego-based investment firm, best known for its efforts to bring down the well-compensated CEO Jay Sidhu at Philadelphia's Sovereign Bank ( SOV), is proposing that Home Depot's board evaluate the company's direction, management's performance and the prospect of strategic alternatives. Relational wants Home Depot's board to create a special committee to consider a corporate restructuring, recapitalization or a partial or complete sale of the company.

It will wage a proxy fight to push the proposal through so it can be considered at next year's annual meeting.

Relational's founder Ralph Whitworth sent a letter to Home Depot CEO Bob Nardelli on Dec. 13 saying the company's board is reponsible for its poor stock performance the past six years. "We attribute this performance todeficient strategy, operations, capital allocation, and governance,'' says Whitworth, in the letter, copy of which was disclosed in a Home Depot filing on Monday.

Home Depot, meanwhile, says it will oppose the Relational proposal. The Atlanta-based company said its board just finished a strategic review.

Relational, which owns just 0.6% of Home Depot, also asked for a meeting with Nardelli. Home Depot said it "advised Relational that it will arrange a meeting shortly after the first of the year to discuss its concerns, consistent with the Home Depot's policy of engaging in an open and direct dialogue with shareholders."

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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