Home Depot (NYSE:HD) spinoff HD Supply — one of the biggest industrial distributors in North America — is joining its former parent in the public markets in what could be one of the biggest IPOs of the year.
HD Supply is a leader in three market sentiments: maintenance, repair and operations; infrastructure and power; and specialty construction. They involve about 1 million products for things like appliances, kitchen/bath cabinets, window coverings, HVAC products, valves, fittings, metering systems, hydrants, storm drains, power equipment and meters.
Yet HD Supply’s business is more than just about providing low-cost distribution. The company also helps its customers with fabrication, kitting, jobsite deliver, managed inventory and Internet tools. All these help to boost margins, which can be thin in the distribution business.
In its S-1, the company noted that its core markets are highly fragmented and generate revenues of about $110 billion per year. HD Supply’s own revenues in fiscal 2012 came to $8 billion.
The company has massive scale, operating an extensive network of more than 600 locations across 46 states and nine Canadian provinces. Its customer count stands at 500,000 — a number that includes contractors, homebuilders, industrial operators and even governments.
Home Depot originally sold off HD Supply in 2007 to a consortium of private equity sponsors — Carlyle (NASDAQ:CG), Bain Capital LLC and Clayton, Dubilier & Rice — for $8.5 billion while retaining a 12.4% equity stake.
Since the financial crisis, HD Supply has taken tough measures to improve its operations. Part of this has involved aggressive moves to reduce costs. Selling, general and administrative expenses fell from 23% to 20.7% of sales since 2009, and the company has invested about $600 million to improve its product line, technology, customer service and systems.
It has been a good formula. In 2012, HD Supply was able to improve its sales by about 14% and EBITDA by 34% to $683 million.
Looking ahead, HD Supply should get a boost from several mega trends. For example, the United States’ water infrastructure is aging and will need to be upgraded. If anything, the recession interrupted this trend, which means the need for investment is even greater now.
HD Supply also should benefit from growth in construction spending. The real estate market has been in rebound for more than a year now with little sign of a slowdown.
While terms have yet to be disclosed on the deal (but should within the next few weeks), the buzz is that the company will raise at least $1 billion, with a big slug going to pay down its $8.9 billion in debt.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities, and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.