HD Supply Holdings, a top construction distribution operator, has set the terms for its upcoming IPO.
The company plans to issue 53.2 million shares at a range of $22 to $25 each. Assuming the deal gets priced at the high end of the range, that would mean HD Supply would raise a cool $1.33 billion to make it one of the year’s biggest IPOs.
While this deal shouldn’t have any issue getting off the ground … it’s how high off the ground that’s the issue.
HD Supply offers more than a million stock-keeping units (“SKUs”), which include things like appliances, kitchen/bath cabinets, window coverings, HVAC products, valves, fittings, metering systems, hydrants, storm drains, power equipment and meters. The company also provides a wide array of services, such as fabrication, kitting, jobsite deliver, managed inventory and Internet tools.
Befitting such an offering, HD Supply has a massive infrastructure: 600 locations across 46 states and nine provinces in Canada, powered by about 15,000 employees.
To deal with the post-crisis recession, HD Supply underwent an aggressive restructuring, and since 2009, the company’s “selling, general and administrative” expenses fell from 23% to 20.7% of sales. The company invested some of those savings into its product line and infrastructure.
That has led to quite the growth ramp. During fiscal year 2013, revenues improved 14% year-over-year to $8 billion, and adjusted EBITDA climbed by an impressive 34% to $683 million.
Looking forward, HD Supply should benefit from some strong megatrends, such as the need to upgrade America’s aging infrastructure — which should involve large-scale purchases for a number of its products — as well as the rebound in the real estate industry and the resulting strong demand for construction products.
And yet while all this should point to a successful IPO, HD Supply might not necessarily be a slam dunk.
While it’s true that some real estate plays have done well — take Restoration Hardware (RH), which is up 140% since going public in November 2012, including a nearly 20% push today — there have been lots of clunkers, such as Orchid Island Capital (ORC), ZAIS Financial (ZFC) and Ellington Residential Mortgage REIT (EARN), which have declined a respective 17.4%, 16.7% and 13% since their IPOs.
In fact, the average return of this year’s 17 real estate-related deals is a paltry 2.7%, compared to a 20.5% return for all of 2013’s IPOs.
The rise in interest rates has been a huge issue, making REITs less attractive when compared to bonds. Plus, these increases could result in a slowing of real estate activity considering how heavily the industry relies on debt.
None of this is to say that HD Supply’s IPO will be a stinker; it just might not be as hot as its underlying business might indicate.
Investors would be wise to keep a close eye on interest rates and market volatility — both could be important indicators of tough HD Supply’s going might get.