2006: Year of the Megadeal

Home Depot’s purchase of Hughes Supply made headlines, but it won’t be the last of the big acquisitions of electrical distributors in 2006.

Not long after clearing its aisles of Christmas trimmings, Home Depot gave itself a nice present and plunked down more than $3 billion for Hughes Supply, Orlando, Fla., the diversified distributor of electrical, plumbing, utility, waterworks and MRO supplies.

Although electrical folks count Hughes Supply as a formidable competitor that's well positioned in the fast-growing Southeast, electrical supplies account for a surprisingly small 10 percent of the company's total sales. Indeed, the Hughes Supply holdings in plumbing and maintenance repair operations (MRO) may be of even more interest to Big Orange than electrical supplies as it builds its presence with contractors in a broad variety of markets.

With its astronomical growth rate in its core do-it-yourself (DIY) business expected to taper off because of market saturation, Home Depot clearly wants to build its business outside the doors of its 2,000-plus stores in the United States, Canada, and Puerto Rico. With 500 locations in 38 states selling a diverse basket of 350,000 products, the acquisition of Hughes Supply will give Home Depot instant credibility with thousands of the professional contractors it covets.

Home Depot was already familiar with the distribution business through its acquisitions in the MRO, industrial, builder supply, plumbing, waterworks, utility, fasteners, HVAC and light residential remodeling markets. In addition, the day before the Hughes Supply deal was announced, the company finalized the purchase of Chem-Dry, a franchise-based carpet and upholstery cleaning business. Home Depot reportedly wants to learn the franchising business to see how it may apply to its other contractor-based businesses.

Some people think the Hughes Supply acquisition will change the entire landscape of the electrical wholesaling industry. It's clearly a mammoth acquisition with some potentially monstrous impact, but I believe time will tell as to just how much it will change this industry.

While Home Depot could decide to load all of its 500 locations with electrical supplies, right now Hughes Supply's biggest footprint in the electrical market is in the Southeast. Also consider the fact that with its other distribution businesses, Home Depot has tended to continue marketing the companies by their original names, and has taken a less visible public role. Finally, don't underestimate the power of any well-run independent electrical distributor that competes with Home Depot. Customers aren't going to just leave their preferred sources of supply for Hughes Supply just because Home Depot owns the company.

At the recent NAED Western Conference, Bill Elliott, president of Elliott Electric Supply, Nacogdoches, Texas, and this year's NAED chairman, reminded attendees that the most profitable electrical distributors (as measured by NAED's PAR report) actually have better financial numbers than Home Depot.

Don't ignore Home Depot's move into the electrical market, but don't overplay it, either. There will be plenty of other acquisitions on which to speculate in 2006. GE Supply, Shelton, Conn., and its 150 locations are reportedly for sale. Richard Worthy, who quickly built Sonepar into one of the biggest electrical distributors in the United States before leaving the company in 2004, is reportedly back in the acquisition game, now that his noncompete clause has expired with Sonepar. All in all, 2006 should be a very interesting year in the electrical market.

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