Home Depot Inc., the world's largest home-improvement retailer, made its biggest acquisition Tuesday, agreeing to pay $3.19 billion for Hughes Supply Inc. to increase sales to professional builders.
Shareholders of Hughes Supply, which sells everything from cement to heating and air conditioning systems, will receive $46.50 a share, 21 percent more than Monday's closing stock price. The company had $4.42 billion in sales in the last fiscal year and operates more than 500 stores in 40 states, Atlanta-based Home Depot said in a statement Tuesday.
The purchase will help double the size of Home Depot's supply division to $12 billion in revenue, allowing the company to continue its drive to win professional customers. Chief Executive Officer Robert Nardelli has made three acquisitions in the past year to expand sales beyond people who renovate and repair their homes.
"They're doing the right things and getting in the right areas," said Marvin Roffman of Roffman Miller Associates in Philadelphia, which owns 125,000 Home Depot shares among $370 million in assets. "The professional builder market is a $400 billion-plus market. When you're the second-largest retailer, if you want to continue to grow you have to continue to go after really large targets."
Shares of Home Depot rose 98 cents, or 2.4 percent, to close at $41.80 Tuesday on the New York Stock Exchange. Hughes Supply, based in Orlando, Fla., gained $7.06, or 18 percent, to $45.61. Home Depot shares fell 5.3 percent last year. Hughes Supply rose 11 percent in 2005.
Home Depot is making acquisitions as it has become more challenging to find new store locations and sales growth lags behind Lowe's Cos., the second-largest home-improvement retailer.
Home Depot has about 2,000 stores, while Lowe's has about 1,175 and is still expanding into large U.S. cities. Home Depot boosted sales an average of 12 percent a year over the past five years, compared with an average gain of 18 percent at Lowe's, based in Mooresville, N.C.
"This deal makes a lot more sense than anything they've shown us recently," said Dan Poole, who helps manage about $34 billion at Cleveland-based National City Corp., including Lowe's and Home Depot shares. "They're doubling the size overnight and expect it to be accretive in year one. It's less of a reach and more in step with the current business."
In the transaction announced Tuesday, Home Depot said it will assume $285 million in debt. The Home Depot supply division accounts for about 4 percent of the retailer's revenue. The company was advised by Morgan Stanley and Cleary Gottlieb Steen & Hamilton LLP.
Hughes Supply sells products such as fire hydrants and water meters and heating, ventilation and air conditioning parts to plumbing and electrical contractors. Its customers also include utilities, cities and property management companies.
The company reported profit of $124 million on $4.42 billion in sales last fiscal year. Sales have grown an average of 14 percent in the past three years. Its market value was $2.58 billion at the close of New York Stock Exchange composite trading Monday.
It has about 2 percent of the roughly $200 billion market for wholesale construction, repair and maintenance products, according to its annual report. It has 9,600 employees, including about 2,400 in sales.
"Hughes, as big as they are, came to the realization that they need to be a part of the consolidation that's going on in the industry," David Manthey, a Hughes Supply analyst with Robert W. Baird & Co. in Milwaukee, said in an interview. "It takes what was one of the best companies in the pro market and combines it with the strength of Home Depot."
Hughes Supply was founded in 1928 by Clarence Hughes and his son Russell as a distributor of electrical supplies and equipment. Harry Hughes, who would become the second CEO, joined a year later. His son, David, was CEO from 1974 until Thomas Morgan took over that role in 2003 and became the first outsider to run the company.
Morgan was paid $775,000 in salary and bonus in 2004. He was CEO of EnfoTrust Networks in Atlanta from February 2000 until March 2001. He has also been chief executive of Value America in Charlottesville, Va. Value America was an Internet retailer of computers and office supplies that filed for bankruptcy protection in August 2000.
Home Depot purchased National Waterworks Holdings Inc., a supplier of pipes, valves and other water-system parts, in August for $1.35 billion. It also agreed to buy Litemore Distributors, Canada's largest commercial-lighting supplier, last February. In June, the company said it was buying Williams Brothers Lumber Co., based in Suwannee, Ga.
On Monday, Home Depot purchased Logan-based Chem-Dry, a franchisor of carpet and upholstery cleaners, for an undisclosed amount.
Contributing: George Stein; Dana Cimilluca; Susanna Palmer; Tony Kono; Howard Liberman; Charles Stein; Angharad Couch