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Why Home Depot Plans to Purchase Interline Brands

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Earnings upside from Home Depot’s Interline Brands acquisition

The Home Depot (HD) expects to finalize its acquisition of Interline Brands by 3Q16. Currently, Interline Brands is partly owned by private equity firms Goldman Sachs Capital Partners (GS) and P2 Capital Partners, LLC and by company management.

The acquisition is expected to be accretive to fiscal 2016 earnings. HD expects the Interline Brands acquisition to contribute $0.01 to fiscal 2016 earnings per share (or EPS), according to Carol Tome, the company’s CFO (chief financial officer), on the 2Q16 earnings call. HD can also expect synergies from the deal going forward, as ~42% of the supplier base overlaps with Interline Brands.

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Interline complementary to HD

The Home Depot expects additional revenue from existing customers as well as a sales upside from Interline Brands’ customer base. Interline’s capabilities appear to be complementary to HD and a good strategic fit.

According to comments by Craig Menear, CEO (chief executive officer) of HD, “In today’s environment, we have the ability in many of these faces to handle the remodel portion of the business. But don’t do as well on the maintenance and repair portion. If you think about Interline, they actually do that side and don’t have the capability to do the remodel. So we can take an end-to-end look at how we service the customers and grow our share of wallet with them overall.”

Growth upside

Currently, both HD and number-two home improvement chain Lowe’s (LOW) derive about a third of their sales from the pro customer. The Interline purchase will provide HD with opportunities to increase the sales contribution from this segment. This represents a more recurring and larger sales opportunity compared to the occasional retail customer. HD should benefit from Interline’s large, targeted sales force and national distribution network.

HD and LOW together constitute 7.6% of the holdings of the iShares US Home Construction ETF (ITB) and 6.3% of the SPDR S&P Homebuilders ETF (XHB).

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