By Deborah Mary Sophia, Savyata Mishra and Abigail Summerville
(Reuters) -Home Depot will buy building materials supplier SRS Distribution in an $18.25 billion deal, in the top U.S. home improvement chain's largest acquisition, as it looks to broaden its professional customer base to better tackle tepid demand.
The company and rival Lowe's (NYSE:LOW) Cos have projected a slower recovery this year as U.S. consumers pause big home remodeling and renovation projects due to sticky inflation.
This has put pressure on the Do-It-Yourself (DIY) segment, which makes up about half of Home Depot (NYSE:HD)'s business, and the company has sharpened its focus on "Pro-customers" such as professional builders and contractors to drive sales.
Thursday's deal will help Home Depot leverage SRS' warehouse network and delivery fleet to better serve existing customers.
SRS, a portfolio company of private equity firms Leonard Green & Partners and Berkshire Partners, primarily serves Pro-customers including roofers, landscapers and pool contractors. The firm, which raked in $10 billion in revenue in 2023, will operate as an independent unit within Home Depot.
Leonard Green had bought a majority stake in SRS in a $3.55 billion deal in 2018, a person familiar with the matter told Reuters on Thursday.
Last December, Leonard Green allowed some of its fund investors to cash out of SRS at a valuation of about $16 billion, including debt, the source said, adding Home Depot agreed to the deal following a sale process for the company.
"This is a great deal at a great time," said Thomas Hayes, chairman at Great Hill Capital.
"You need (to) only look to the housing shortage - and young demographics of our millennials - to understand that as rates moderate construction will boom," he said.
Shares of Home Depot, which has a market value of $382.42 billion according to LSEG data, slipped 1%. Home Depot will assume SRS' debt and will fund the deal with cash on hand and debt.
'DRIVING CUSTOMER EXPERIENCE'
The deal is all about "driving the customer experience" along with sales and profitability, Home Depot CFO Richard McPhail said on a call with analysts.
The company has often faced criticism from customers, particularly larger contractors, over order, delivery and logistics hiccups that could hinder timely completion of projects.
"The problem with (ordering on Home Depot's website) is when it comes to delivery, it's very sporadic ... the problem was always logistics" said Eddie Prchal, CEO of Gunner, a roofing solutions firm.
Through the deal, expected to close by the end of fiscal 2024, Home Depot will add SRS' network of more than 2,500 professional sales force in 760 plus locations to its footprint of over 2,000 U.S. stores and distribution centers.
It would also allow Home Depot to take advantage of SRS' more than 4,000 truck fleet and jobsite delivery capabilities.
"SRS is very good at delivering those things. (They have) good customer service, deliveries on time... So Home Depot will be able to start servicing and have a whole new focus on contractors," Prchal said.