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Home Depot Makes a Pro Play with Its Interline Brands Purchase

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Home Depot (HD) announces its intention to acquire Interline Brands

On July 22, The Home Depot (HD) announced that it had entered a definitive agreement to acquire Interline Brands, which is a Florida-based company specializing in providing MRO[1. Maintenance, repair, and operations] services to businesses and residential customers. Home Depot expects to close the deal by 3Q16.[2. The quarter ending November 1, 2015]

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About Interline Brands

Interline Brands is partly owned by private equity firms Goldman Sachs Capital Partners (GS) and P2 Capital Partners LLC and partly owned by company management. The company clocked EBITDA[3. Earnings before interest, taxes, depreciation and amortization] of ~$144 million on sales of ~$1.7 billion in the last 12 months. [4. Through the first quarter of fiscal 2015]

Interline has over 175,000 customers. The company sells repair products to property managers of institutions and apartment buildings. Most of its sales stem from institutional customers (49%), with 31% and 20% of revenue coming from the multi-family and residential end-markets, respectively. It’s the market leader in the first two segments, and it holds a top-five ranking in its residential segment.

Interline Brands sells both proprietary products as well as branded products from other companies, like General Electric (GE), Fluidmaster, Kohler, and Georgia-Pacific.

Strategic benefits

The Interline purchase is expected be accretive to HD’s fiscal 2016 earnings. Home Depot and rival Lowe’s (LOW) earn about a third of their sales from pro customers. Growing sales from this category is critical, as these are typically repeat buyers that have a larger basket size compared to the occasional “do-it-yourself” or “do-it-for-me” customer. Both companies are bent on increasing their e-commerce and brick-and-mortar attractors for pro customers.

Home Depot is also expected to benefit from Interline’s extensive supply chain network. The company has 93 distribution points, long-term relationships with ~3,000 suppliers, and a strong sales force nationwide. This will enable HD to go out more aggressively after the pro customer and increase its sales contribution from the category.

The Interline purchase is all the more critical to HD as existing building stock ages and an improving economy makes those repair and renovation jobs more affordable.

HD and LOW together constitute 7.6% of the holdings in the iShares U.S. Home Construction ETF (ITB), 6.3% in the SPDR S&P Homebuilders ETF (XHB), and 1.4% in the iShares Russell 1000 Growth ETF  (IWF).

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