Home Depot & Hughes Supply?

Rumors are rampant on possible acquisition talks

The rumor mill is churning over whether The Home Depot is looking to buy diversified distributor Hughes Supply. Hughes' recent strong financials paired with increased global competition and consolidation have caused the company to examine ways to continue growing. Two analysts give their take on the speculation, and we offer a little background on why Hughes may be an attractive target.

Speculation has risen in recent weeks that The Home Depot Inc., Atlanta, GA, may launch or may have already launched a bid for industrial distributor Hughes Supply Inc., Orlando, FL. The speculation was fueled by the announcement a couple of weeks ago that Hughes' Board of Directors has authorized the company to "consider strategic alternatives for the company to maximize shareholder value."

"It's just speculation at this point," says David Manthey, senior distribution analyst who follows Hughes for Robert W. Baird & Company Inc., Milwaukee, WI. "This has been rumored for five or more years. But it does seem to be more credible today given the pace of consolidation."

In a recent press release, Hughes announced that its "enviable market position and product portfolio," as well as the continued acceleration of consolidation in the distribution industry, made now a good time to evaluate growth options. Hughes has also taken the step of retaining Lehman Brothers as its financial adviser, and Weil, Gotshal & Manges LLP as its legal adviser.

"With new and larger players entering our industry, the competitive landscape is changing quickly," President and CEO Tom Morgan says in the release.

Manthey says Hughes has four alternatives: to stay the course; to stay the course and divest something; to take the company private; or to merge with another company.

"Whether it is a Hughes-directed action, or if they're responding to an offer that's on the table, it's hard to say," he says. "It's one or the other. My guess is that there has to be something there."

Manthey says a private equity firm could also be looking at Hughes.

Hughes Supply is a distributor of construction, repair and maintenance-related products. The company recently upped its forecasts for the third quarter ending Oct. 31. Revenues are expected to be in the range of $1,480.0 million to $1,490.0 million, up 27-28 percent from the previous year. The growth has been driven by sales across the board, but especially in the Water and Sewer, Utilities, and MRO businesses, according to the Hughes release.

Manthey says acquiring Hughes would fit with Home Depot's strategic mandate to expand beyond retail in the U.S. "Hughes is really one of the last remaining big players they could buy to get into a lot of different areas at once," Manthey says. "As a premiere multifaceted property, I think it would be attractive to Home Depot."

Home Depot, which recorded revenues of $73 billion in fiscal year 2004, has been steadily building its way into increasingly diverse professional construction and repair supply markets. Recent acquisitions include:

  • White Cap Construction Supply, a $500-million construction contractor distributor;

  • fast-growing National Waterworks Inc., a $1.4-billion distributor of products used to build, repair and maintain water and sewer systems; and

  • Williams Brothers Lumber Co., a roofing and lumber supplier with estimated annual revenues of more than $400 million.

    According to a news release from Home Depot earlier this year, the company is focused on building a leadership position in markets that serve business-to-business customers such as maintenance and repair professionals, homebuilders and commercial builders, an approximately $410 billion market opportunity.

    Michael Cox, a Piper Jaffray senior research analyst, says Home Depot's supply business has grown to comprise about 4 percent of its total revenues, or roughly $3 billion.

    Cox wouldn't comment specifically on the rumors that Home Depot may be looking to acquire Hughes. But he says it would be a different growth strategy than the company has used in the past. He says Home Depot typically acquires smaller companies that can be built up quickly. When the company bought National Waterworks, which has roughly a third of the revenues of Hughes, it caused eyebrows to elevate on Wall Street, Cox says.

    Bidding for Hughes "would certainly draw a lot of questions from investors," Cox says. But he says it would not necessarily be a bad move, considering Hughes' strong growth in recent years.

    Some speculation also puts Home Depot shopping overseas, possibly by acquiring the struggling European home-improvement retailer Kingfisher plc ($13 billion in revenues), based in London. Cox says Home Depot management consistently denies wanting to acquire Kingfisher. Asia has been mentioned in news reports as well as another region ripe for Home Depot to expand retail operations.

    By Lindsay Young

    Modern Distribution Management is an independent newsletter covering wholesale distribution issues since 1967. It can be found online at www.mdm.com.