Home Depot Brings Back HD Supply In An $8B Deal; Telsey Turns Bullish

Leading home improvement retailer Home Depot has entered into an agreement to acquire HD Supply Holdings, a national distributor of maintenance, repair and operations (or MRO) products in the multifamily and hospitality end markets. The company had spun-off HD Supply in 2007 to Bain Capital, Carlyle Group and Clayton, Dubilier & Rice.

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The deal comes at a time when the demand in the home improvement sector is strong as people spend more time at their homes due to the pandemic. Home Depot (HD) is acquiring HD Supply for $8 billion and plans to fund the deal through a combination of cash and debt. It expects to complete the acquisition in the fiscal fourth quarter (ends on Jan. 31, 2021), with it being accretive to earnings in fiscal 2021.

Cheering the acquisition, Home Depot’s CEO Craig Menear said, “HD Supply complements our existing MRO business with a robust product offering and value-added service capabilities, an experienced salesforce that enhances the strong team we have in place, as well as an extensive, MRO-specific distribution network throughout the U.S. and Canada.” (See HD stock analysis on TipRanks)

In reaction to the acquisition news, Wells Fargo analyst Zachary Fadem stated, “In our view, a deal to bring HD and HDS back together (following the company’s separation in 2007) makes more sense, as HDS is the #1 MRO player in a $55B category with a strong private label offering, healthy gross/EBITDA margins (~42%/~16% vs. ~34%/~14% HD), and a debt-free balance sheet ($900M net cash).”

“We believe a deal for HDS would also accelerate HD’s strategic initiatives to better serve Professional customers, broaden its ability to provide job site delivery (via HDS’s logistics capabilities), and enhance HD’s existing MRO/Interline capabilities,” added Fadem. The analyst has a Buy rating for Home Depot with a price target of $310.

Also, Telsey Advisory analyst Joseph Feldman upgraded Home Depot to Buy from Hold on strong business trends and the HD Supply acquisition. Feldman increased the price target to $315 from $300.

Meanwhile, Home Depot is scheduled to announce its fiscal third quarter results today. Shares have risen 28% year-to-date and the average price target of $313.32 implies further upside potential of 12.1% in the months ahead. Overall, Home Depot scores a Strong Buy analyst consensus based on 16 Buys versus 4 Holds.