Private equity eyeing Home Depot?

Alisa Roth Dec 1, 2006

KAI RYSSDAL: Build giant warehouses all over the country. Stuff them full of plumbing supplies and electrical fixtures. Have the great good fortune to be in business during a historic run-up in real estate. Slap a sign on it and call it Home Depot. Until some stumbles recently the home improvement giant’s had a pretty good ride the past decade.

So maybe rumors of a takeover bid should be no surprise. Talk is a couple of private equity firms are looking to take Home Depot off the market. And pay big for it too. CEO Bob Nardelli denies a deal’s in the works. But shares rose 3 percent today after investors bought into the rumor. Marketplace’s Alisa Roth had a look see.

ALISA ROTH: The two private equity firms said to be contemplating a takeover are Kolberg Kravis Roberts and Texas Pacific Group. The potential deal is said to be worth around $100 billion. That’s almost three times the amount of the biggest leveraged buyout ever.

JOHN MORRIS: It’s a little bit hard to see how to make this deal work. It would certainly be a stretch on the private equity side of it, simply because of the price.

John Morris is an editor at the trade publication The Deal. He says it would be hard even for cash-rich private equity firms to come up with that kind of money.

But Susan Chaplinsky, who studies private equity at the University of Virginia, thinks it might just be possible, for two reasons.

SUSAN CHAPLINSKY: One is just the growth in the overall size of funds under the management of private equity firms. At the same time these funds have grown larger, you have multiple funds involved in the buyout of a single company.

Those kinds of deals limit the risk any one private equity firm takes on.

Home Depot’s share prices have been falling, partly because it’s facing more competition from places like Lowe’s. Earlier this month, its CEO blamed the softening housing market for lousy third quarter earnings.

Still, Morningstar analyst Pat Dorsey says a shaky real estate sector shouldn’t matter to private equity speculators.

PAT DORSEY: When people don’t buy new homes, they fix up their current ones and that is a business that Home Depot caters to very well.

Dorsey says he thinks the stock is undervalued, and he says maybe the private equity firms are seeing something in Home Depot that Wall Street is just missing.

In New York, I’m Alisa Roth for Marketplace.

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