Story Stocks®
Updated: 25-Sep-19 13:42 ET
HD Supply Holdings looks to add shareholder value by dividing company (HDS)
HD Supply Holdings (HDS) is a company in need of a shake-up. It has been battered this year by tariffs, a slowing residential construction market, labor shortages, and vendor system issues. Each of those issues have put a dent in the company's financial results.
In fact, the distributor of facility maintenance and construction products has lowered its FY20 guidance twice this year, including in its 2Q19 earnings report on September 20.
Not surprising, the stock has struggled, down about 20% since early May.
In addition to the aforementioned headwinds that are plaguing HDS, differing financial profiles of the company's two segments - Facilities Maintenance (50% of revenue) and Construction and Industrial (C&I) - have held it back.
Therefore, when HDS announced last night that it plans to separate its Facilities Maintenance and C&I segments into two publicly traded companies, investors reacted favorably by pushing the stock higher by 5%.
While the final structure of the transaction is still being work out, HDS is anticipating the action to be tax-free and for it to be completed by mid-2020.
The primary rationale for the separation is that each segment already acts as an independent company with very little customer and vendor overlap and with differing financial models.
During a conference call this morning, HDS' CEO Joseph DeAngelo commented that the operations are generally autonomous between the two companies, but that there are some shares services in the back office. That likely includes the HR and customer service departments.
Overall, the limited overlap should curb the dis-synergies resulting from the transaction.
Furthermore, the facilities management segment, which focuses on selling MRO (maintenance, repair, operations) products, is a more stable business that generates higher margins than the C&I business.
In FY18, Facilities and Maintenance grew revenue by 8.5% compared to 30% for C&I. However, operating and Adj. EBITDA margin was 15.5% and 17.7% compared to 8.3% and 11.0% for C&I.
Considering the different financial characteristics, each segment would have varying strategies related to capital allocation. Once separated, the companies will be free to deploy capital in a manner that best suits them.
For instance, given Facilities Maintenance cash flow generating capabilities, that company might consider implementing a dividend policy.
Lastly, the management structure was already in place to smoothly execute this transition.
DeAngelo will serve as CEO of the Facilities Maintenance company while the current CFO of HD Supply, Evan Levitt, will serve in the same capacity for Facilities Maintenance.
John Stegman, currently the President of C&I, will become CEO of that company and the current COO of C&I, Alan Sollenberger, will keep that same role.
Key Takeaway: The separation of HDS' two business segments makes sense given the differing financial profiles, capital allocation strategies, and limited overlap. Also, with each segment generating about $3 bln in revenue annually, each has the size and scope to effectively operate individually.
In fact, the distributor of facility maintenance and construction products has lowered its FY20 guidance twice this year, including in its 2Q19 earnings report on September 20.
Not surprising, the stock has struggled, down about 20% since early May.
In addition to the aforementioned headwinds that are plaguing HDS, differing financial profiles of the company's two segments - Facilities Maintenance (50% of revenue) and Construction and Industrial (C&I) - have held it back.
Therefore, when HDS announced last night that it plans to separate its Facilities Maintenance and C&I segments into two publicly traded companies, investors reacted favorably by pushing the stock higher by 5%.
While the final structure of the transaction is still being work out, HDS is anticipating the action to be tax-free and for it to be completed by mid-2020.
The primary rationale for the separation is that each segment already acts as an independent company with very little customer and vendor overlap and with differing financial models.
During a conference call this morning, HDS' CEO Joseph DeAngelo commented that the operations are generally autonomous between the two companies, but that there are some shares services in the back office. That likely includes the HR and customer service departments.
Overall, the limited overlap should curb the dis-synergies resulting from the transaction.
Furthermore, the facilities management segment, which focuses on selling MRO (maintenance, repair, operations) products, is a more stable business that generates higher margins than the C&I business.
In FY18, Facilities and Maintenance grew revenue by 8.5% compared to 30% for C&I. However, operating and Adj. EBITDA margin was 15.5% and 17.7% compared to 8.3% and 11.0% for C&I.
Considering the different financial characteristics, each segment would have varying strategies related to capital allocation. Once separated, the companies will be free to deploy capital in a manner that best suits them.
For instance, given Facilities Maintenance cash flow generating capabilities, that company might consider implementing a dividend policy.
Lastly, the management structure was already in place to smoothly execute this transition.
DeAngelo will serve as CEO of the Facilities Maintenance company while the current CFO of HD Supply, Evan Levitt, will serve in the same capacity for Facilities Maintenance.
John Stegman, currently the President of C&I, will become CEO of that company and the current COO of C&I, Alan Sollenberger, will keep that same role.
Key Takeaway: The separation of HDS' two business segments makes sense given the differing financial profiles, capital allocation strategies, and limited overlap. Also, with each segment generating about $3 bln in revenue annually, each has the size and scope to effectively operate individually.
