The Exchange

HD Supply, Former Home Depot Unit, Plans IPO

Believers in the housing recovery might contend they got another bit of evidence to bolster their case Thursday, while believers in a re-expanding home market bubble could claim the same.

HD Supply Holdings, formerly part of Home Depot (HD), is the latest company with ties to the housing sector that plans to offer stock, according to a filing with SEC. Private equity firms Bain Capital Partners, Carlyle Group and Clayton, Dubilier & Rice, are HD Supply's primary owners. Home Depot has kept a stake of 12.5%.

For now, the size of the offering isn't set, but the company estimated the amount for the purpose of filing requirements at $1 billion. HD Supply listed sales of $8.04 billion for the fiscal year ended Feb. 3, 2013, with a loss of $1.18 billion. Total long-term debt outstanding on that date was $7.33 billion.

HD Supply is about construction broadly. It's not entirely a bet on housing, although that is a substantial part of what it does. As HD says in the risk factors section that's mandated in filings such as these, "[m]ost of our business units are dependent to varying degrees upon the new residential construction market." Varying degrees is a key element of this, and it's important to note this is language that's carefully overseen by attorneys.

The larger point, however, is that with a recovering housing market, HD Supply theoretically would benefit, and that in times when housing is suffering, it would feel the slowness. Its segments are Facilities Maintenance, Waterworks, Power Solutions and White Cap, the last of which serves professional contractors. The Facilities Maintenance division includes multifamily housing units as customers, while Waterworks is involved in water and wastewater products for both non-residential and residential projects.

Home Depot sold HD Supply in 2007, receiving $8.2 billion in cash and retaining the minority ownership stake in return. That was a year before the financial markets collapsed, driven by the freeze-up in housing. Home Depot is HD's largest customer, being responsible for some 4% of last year's sales. The company has more than 600 locations in the U.S. and Canada.

Whether housing is "back" may be the subject of continuing debate. It's certainly not where it was in the middle of the last decade during the height of the bubble. Builder stocks have been reflecting a recovery -- PulteGroup (PHM) was the best percentage gainer on the S&P 500 last year -- but there's little doubt the group has gotten overheated by some investors' standards. (Home Depot itself is the best stock on the Dow Jones Industrial Average measured over the last five years. Since the market low of March 2009, it's up 247%. Competitor Lowe's (LOW) has gained 144%.)

If the appetite weren't there, though, offerings wouldn't be coming. Thus far in 2013, two homebuilders have completed IPOs, Taylor Morrison (TMHC) and TRI Pointe Homes (TPH). Another member of the sector is planning to go public in the near future, as William Lyon Homes filed documents with regulators this week announcing that it will sell shares.

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