Home Depot: Why Sell?

Investor Marvin Roffman gives BusinessWeek his two cents regarding the cheap sale price, "politics" in play, and "unhappy campers"

When Home Depot (HD) announced in June that it would sell its building contractor supply business to three private equity firms for $10.3 billion, investor Marvin Roffman thought the move was a mistake. Roffman's $288 million investment fund, Roffman Miller Associates, owns 172,000 shares of the company, which is focused mostly on selling building products to do-it-yourself renovators. Roffman argued that Home Depot, under pressure from hedge funds that wanted a quick boost in the stock price, was selling the unit too cheaply and compromising longer-term growth prospects.

When Home Depot said in early August that the sale to private equity firms the Carlyle Group, Bain Capital, and Clayton, Dubilier & Rice might be renegotiated because of deteriorating conditions in the housing and credit markets, Roffman found even more reason to dislike the deal (see BusinessWeek.com, 8/10/07, "Home Depot's Big Discount"). The renegotiated sale price—an 18% reduction that brings the price down to $8.5 billion—was announced on Aug. 27.

Here are edited highlights from BusinessWeek.com's conversation with Roffman:

Is Home Depot making a mistake by selling its supply business now, while it is under pressure from some investors?I thought former CEO Bob Nardelli, who resigned under pressure in January [see BusinessWeek.com, 1/4/07, "Out at Home Depot"], was right to invest in the supply business. The supply business is a way to grow a mature company. If you look ahead five years or so, I think the growth of the supply business will be much faster than that of the retail operations. It was a wonderful way to grow at an accelerated rate.

Is the original sale price of the supply unit a good deal for Home Depot investors?The Home Depot is getting rid of the supply business for [less than] one times sales. That is a pretty low price.

If the deal is unfavorable, why is Home Depot moving ahead with it?What happened is that a lot of politics came into play. A lot of people were upset with Nardelli and his compensation. When [new Chief Executive Frank Blake] came in, some investors were pushing for a higher stock price and this thing went up for sale and the company announced a stock buyback. But I really thought Nardelli's idea was pretty good. The do-it-yourself market is a mature business and I thought the contractor supply business, fragmented among thousands of small independent dealers, was where the do-it-yourself market was 20 years ago.

Do you think the $22..5 billion stock buyback, which is being reduced by 5%, makes sense?I like the idea of the stock buyback. But you can't do both. You can't buy back that much stock when you are selling something off, unless you want to lever up the balance sheet.

Where does Blake stand with investors?There are a lot of unhappy campers out there. It would not surprise me if there was a change in management. The community is not going to put up with this.