IPO Report: HD Supply

Based in Atlanta, Georgia, HD Supply Holdings (HDS) scheduled a $1.25 billion IPO with a market capitalization of $4.3 billion at a price range mid-point of $23.50 for Thursday, June 27, 2013.

10 POs are scheduled for the week of June 24th. The full IPO calendar is at IPOpremium.  Trial and paid & trial subscribers get early, complete financial analysis.

S-1 filed June 1, 2013

Manager Joint Managers:  BofA Merrill; Barclays; J.P. Morgan; Credit Suisse

Co-Managers:  Citi; Deutsche; Goldman; Morgan; UBS; Wells; Baird; William Blair; Raymond James;  BB&T Capital; SunTrust Robinson; Drexel Hamilton; Guzman

Conclusion

6/24 HDS update:  avoid, segment stocks declined on Monday, including other highly leveraged distributors that IPO’d this year– PGEM, BCC

HDS is a major segment competitor.  Institutions tend to buy sectors, rather than individual stocks.  On that basis it seems probable that institutions will add HDS to their sector holders.  In this market, however, a $1.2 billion IPO might get a bit sloppy.

Summary 

HDS is one of the largest industrial distributors in North America.  HDS was a 2007 private equity buyout from Home Depot (HD), which retained a 12.5% equity interest at the time.  Q1 ’13 revenue was up 13% vs Q1 ’12.  Proforma adjusted quarterly earnings were $29 million.

Valuation

 Glossary

Valuation comparisons
Price-to-sales:  discount to GWW & FAST
P/E ratio:  just below FAST, much highter than GWW.
Profit margins:  a little higher than FAST
Price-to-book:  HDS has been stripped of cash, like most private equity buy-outs

Business

HDS is one of the largest industrial distributors in North America. HDS believes it has a leading position in the three distinct market sectors:

• Maintenance, Repair & Operations;
• Infrastructure & Power; and
• Specialty Construction.

In 2007, investment funds associated with HDS’s Equity Sponsors formed HD Supply and purchased HDS from Home Depot. In connection with the 2007 Acquisition, Home Depot obtained a 12.5% interest in the common stock of HD Supply.

Market size

HDS estimates that the aggregate size of its currently addressable markets is approximately $110 billion annually.

Scope of operations

HDS operates through over 600 locations across 46 U.S. states and nine Canadian provinces, with 15,000 associates delivering localized, customer-tailored products, services and expertise.

HDS serves 500,000 customers, which include contractors, government entities, maintenance professionals, home builders and industrial businesses.

HDS’s broad range of end-to-end product lines and services include over one million SKUs of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire lifecycle of a project from infrastructure and construction to maintenance, repair and operations.

Four reportable segments

 Facilities Maintenance: HDS estimates that its Facilities Maintenance business unit serves a currently addressable market of $48 billion annually, which includes multifamily, hospitality, healthcare and institutional facilities.

Products include electrical and lighting items, plumbing, HVAC products, appliances, janitorial supplies, hardware, kitchen and bath cabinets, window coverings, textiles and guest amenities, healthcare maintenance and water and wastewater treatment products.

Waterworks: HDS estimates that its Waterworks business unit serves a currently addressable market of $10 billion annually, which includes the non-residential, residential, water systems, sewage systems and other markets.

Products include pipes, fittings, valves, hydrants and meters for use in the construction, maintenance and repair of water and wastewater systems as well as fire-protection systems.

 Power Solutions: HDS estimates that its Power Solutions business unit serves a currently addressable market of $35 billion annually, which includes the utilities and electrical markets. 

Products include conductors such as wire and cable, transformers, overhead transmission and distribution hardware, switches, protective devices and underground distribution, connectors used in the construction or maintenance and repair of electricity transmission and substation distribution infrastructure, and electrical wire and cable, switchgear, supplies, lighting and conduit used in non-residential and residential construction.

White Caps: HDS estimates that its White Cap business unit serves a currently addressable market of $19 billion annually.

Products include tilt-up brace systems, forming and shoring systems, concrete chemicals, hand and power tools, rebar, ladders, safety and fall arrest equipment, specialty screws and fasteners, sealants and adhesives, drainage pipe, geo-synthetics, erosion and sediment control equipment and other engineered materials used broadly across all types of non-residential and residential construction.

Seasonality

In a typical year, HDS’s operating results are impacted by seasonality. Historically, sales of products have been higher in the second and third quarters of each fiscal year due to favorable weather and longer daylight conditions during these periods.

Competition 

The majority of competition comes from mid-size regional distributors and small, local distributors; however, HDS also faces competition from a number of national competitors, including Fastenal, Grainger, MSC Industrial, Rexel, Watsco, WESCO and Wolseley plc (Ferguson division).

5% stockholders pre-IPO
Bain Capital Integral Investors 2006, LLC, 28%
Carlyle Partners V, L.P. and related funds, 28%
Clayton, Dubilier & Rice Fund VII, L.P. and related funds, 28%
THD Holdings, LLC, 12.4%

Use of proceeds

HDS expects to net $1.12 million from its IPO.  Proceeds are allocated as follows: 

• Retire all $950 million of the outstanding January 2013 Senior Subordinated Notes

• Retire $125 million of the outstanding October 2012 Senior Notes

•  Pay the Equity Sponsors a transaction fee of $13 million.