(Bloomberg Opinion) -- Among the industries hit hardest by the pandemic, few have fared worse than hospitality. Tourism and business travel have stalled amid government-mandated lockdowns and fears of infection. Hotels got lumped in with restaurants and gyms as the locations most prone to the spread of coronavirus in a recent study conducted by researchers at Stanford University and Northwestern University. And yet, Home Depot Inc. just agreed to pay $8.7 billion to buy a company that gets a fifth of its revenue from selling maintenance products — think janitorial supplies, but also faucets and air conditioners — to hotels and resorts.
The home-improvement retailer said Monday that it was acquiring HD Supply Holdings Inc. for $56 a share. That works out to $8 billion after adjusting for the target's net cash position. This is a reunion of sorts: the HD in HD Supply used to stand for Home Depot, which sold the business to a private equity consortium in 2007 for $8.5 billion.
Since reemerging as a standalone public company in 2013, HD Supply has divested both its Waterworks storm and sewer supplies unit and White Cap construction materials business, selling them to Clayton, Dubilier & Rice for a combined $5.4 billion. The White Cap sale closed in October, leaving HD Supply all-in on products used to maintain and repair living spaces.
Facilities maintenance had previously been the company’s crown jewel, but the roles reversed during the Covid-19 crisis, with White Cap’s construction customers bouncing back fairly quickly. By contrast, the facilities-maintenance business’s biggest market is multifamily homes — another sector that was hit hard by the pandemic as a wave of unemployment pressured some residents’ ability to pay rent and a fear of infection made others more willing to make due with leaky faucets or running toilets. Hospitality is the next-biggest market, followed by institutional housing for the military and students and then health care, which in HD Supply’s case primarily means senior-living facilities rather than hospitals.
“That sales vertical is actually our biggest unknown right now,” HD Supply Chief Financial Officer Evan Levitt said of the health-care operations at a September conference. “What's happening is a lot of folks are taking mom and dad out of these facilities for fear of them getting sick. And so, they are dealing with lower occupancy. Now offsetting that is, they're spending a fair amount of expense budget on infection control, cleaning materials. They're trying to keep the common areas safe, spending a lot on PPE. But they are deferring maintenance, deferring capital improvements and that whole industry is under a little bit of financial duress.”
What’s interesting is that even with this backdrop, Home Depot is paying top dollar. The $56-a-share bid represents a 19% premium to HD Supply’s all-time high set in May 2019. It’s also more than 20% higher on average than the price analysts were expecting the company to reach on its own over the next year.
The world is gearing up for a difficult winter with coronavirus hospitalizations on the rise and fresh lockdown measures in the offing, but there is reason for hope. Moderna Inc. said Monday that its Covid-19 vaccine was 94.5% effective in a preliminary analysis. This follows early results released last week that showed a separate vaccine from Pfizer Inc. and BioNTech SE was more than 90% effective. That appears to be good enough for Home Depot. The HD Supply deal is the company’s largest-ever acquisition.
Home Depot reestablished itself in the maintenance and repair products distribution market in 2015 with the $1.6 billion acquisition of Interline Brands Inc. But HD Supply offers a much larger network of distribution centers and delivery drivers. This will help Home Depot boost its appeal to the more lucrative professional contractor customers it’s been trying to court lately. Gordon Haskett analyst Chuck Grom estimates the deal could yield $100 million in synergies, a good chunk of which would come from increased purchasing power for things like cabinets, blinds and appliances.
They say that M&A is the best gauge of CEO confidence. If Home Depot CEO Craig Menear is willing to bet big on the future of hotels, senior-living centers and multifamily housing, maybe there really is a light at the end of this pandemic tunnel.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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