Capital Markets

Analysts Question Home Depot Buyback

Home Depot contends that the share repurchase is not contingent on the sale of its wholesale distribution subsidiary — but securities analysts rema...
Stephen TaubAugust 9, 2007

The Home Depot said that it reduced the price it will pay for its previously announced buyback of 250 million shares. The company expects to reduce the price range in its Dutch-auction tender offer to between $37 and $42 per share, down from between $39 and $44 per share. In addition, it will extend the expiration date of the tender offer to August 31.

The company also announced on Thursday that it is in discussions with Bain Capital Partners, The Carlyle Group, and Clayton, Dubilier & Rice about restructuring the previously announced agreement to sell wholesale distribution subsidiary HD Supply for $10.325 billion. The parent company warned that the discussions with the private equity firms could result “in material changes to the terms and financing of the transaction, including a reduction in the purchase price.”

However, officials stressed that there is no connection between the lower price for the Dutch auction and the anticipated lower price it will likely secure in the divestiture. “The tender offer is not conditioned on the closing of the sale of HD Supply,” the company asserted in a press release. It also stated that the Home Depot remains committed to its recapitalization plan announced on June 19.

Since announcing the recapitalization, the Home Depot’s stock price has fallen about $2.50 per share, including more than five percent on Thursday. Further, Bear Stearns’ fixed income analysts say they are skeptical of Home Depot’s announcement. “We are concerned with management’s announcement that the tender offer is not contingent on the sale of HD Supply,” said the investment bank in a note fired off to clients.

In analyzing the buyback, Bear Stearns assumed that the Home Depot tender for 250 million shares would be at the high end of the share-price range, or $42. This would produce a funding requirement of $10.5 billion. The calculation compares to a prior funding requirement of $11 billion, which used the high end of the previous tender range of $44, Bear Stearns pointed out.

Therefore, when Home Depot agreed to sell HD Supply for $10.325 billion, management had stated that the cash proceeds from the sale would amount to $9.5 billion. That calculation implies that an additional $1.5 billion in funding would be required in the form of cash or debt to complete the tender at the high end of the range, asserted the analysis.

As a result, Home Depot might have to commit more cash to the tender offer to compensate for a lower sale price, said Bear Stearns. The analysts also speculated that the company might have to issue commercial paper, or draw down on its bridge, loan to fund 100 percent of the tender if the sale of HD Supply is delayed. A delay could cause credit-rating agency Moody’s Investors Service to downgrade the company’s long-term credit rating to Baa2.

Also, Bear Stearns posited that Home Depot might have to fund 100 percent of the tender with debt, if the private equity sponsors back out of the purchase agreement for HD Supply altogether. This said, the Bear Stearns analysts, contended that they believe that Home Depot is committed to selling HD Supply, and thus would look to re-auction the company if this were to occur.