Industry executives are split on the potential impact of Home Depot Inc.'s anticipated purchase of Hughes Supply Inc. Some executives contacted for this article think it's a watershed moment for the electrical industry, while others believe the differences in running the retail and wholesale business may be a big challenge for Home Depot.

The biggest question on the minds of many distributors, manufacturers and reps seems to be whether or not Home Depot will acquire more electrical distributors. At least one industry observer said if the Hughes acquisition goes well, Home Depot will buy more electrical distributors. Neil Gillespie, principal, Channel Marketing Group, Pittsburgh, believes Home Depot will buy more distributors if it can improve the profitability of Hughes Supply, and that because of the 12x EBITDA purchase price of the acquisition, many distributors would be interested.

“If you can get even close to that multiple, there would be a lot of people lining up to sell,” he said. “I have no doubt they can raise the profitability of Hughes over the next three years. If they have good success with that, they are definitely going to be in the market for more. They're going to be looking for bigger regional platforms with a minimum of $80 million in sales to an excess of $200 million in sales. That's a real platform to grow out and make more acquisitions on top of.”

Hughes Supply will be part of The Home Depot Supply, a division that has built an impressive position in a range of markets serving business-to-business customers such as home builders, professional contractors, municipalities and maintenance professionals. Built largely through acquisitions of established wholesalers in industrial, construction and commercial trades, The Home Depot Supply division includes a number of distributors through its acquisitions, including National Waterworks, White Cap Construction Supply, MRO Distribution and Apex Supply. (See sidebar on page 14).

The purchase of Hughes Supply more than doubles the size of The Home Depot Supply, and projected 2006 combined sales would approach $12 billion. Together, the two companies will serve a $410 billion market, supplying products for infrastructure, construction, maintenance, repair and remodeling applications.

Hughes Supply will continue to be based in Orlando, Fla., according to documents Hughes has filed with the U.S. Securities and Exchange Commission. The current Hughes senior executive leadership is expected to remain intact until the transaction closes. Tom Morgan, Hughes Supply Inc.'s chief executive officer and president, will leave Hughes after Home Depot buys it, according to the documents. Joe DeAngelo, executive vice president, The Home Depot Supply, will lead the combined organization.

There are no immediate plans to change the name of Hughes. Many of the distributors now part of The Home Depot Supply group of businesses — including National Waterworks, White Cap Construction Supply, Apex Supply and Williams Brothers Lumber Co. — continue to operate under their previous names.

A Home Depot spokesperson said the company could not comment on a specific net margin for Hughes or speculation about possible acquisitions, but would say, “Home Depot Supply will continue to grow through both organic and acquisitive growth.

“I can tell you that acquisitions are a critical element of Home Depot Supply's growth equation, and therefore we follow an extremely rigorous series of steps to ensure their success,” said Paula Smith, Home Depot's public relations manager. “As a result of these actions, all of our acquisitions are exceeding our expectations, growing faster than before our acquisition, and growing faster than their relative market.

“Home Depot Supply is on an impressive growth trajectory,” she said. “By 2010, the company expects that Home Depot Supply will generate 18 percent to 19 percent of overall sales, reaching $23 billion to $27 billion.

“By the end of the decade, Home Depot Supply expects to operate more than 1,500 locations, covering all 50 states, and will be the largest diversified wholesale distribution business in the United States. Our planned acquisition of Hughes Supply is a great example of how we are rapidly replicating in the professional market the same type of transformation that we brought to the home improvement retail market,” said Smith.

To reach these lofty growth goals, Home Depot will have to compete with deep-pocket financial buyers who have the same type of distributors on their shopping lists — solid, well-run companies that offer platforms of growth either by geographic market or by product area. There's plenty of industry chatter about financial buyers or offshore distribution companies who want to build U.S. distribution companies that offer a broad selection of products, rather than focus on a specialty construction trade.

Indeed, one of the big reasons Home Depot wanted Hughes, says Channel Marketing Group's Neil Gillespie, is because of the Hughes One “megacenter” concept, where Hughes Supply sells many of its product lines from different distribution trades from the same branch location. The company's megacenters in Miami and Atlanta (as well as a third one slated to open in Orlando, Fla., this year) showcase products from multiple Hughes businesses, including MRO, water and sewer, electrical utilities, plumbing/HVAC, electrical and tools and fasteners.

“I think Hughes' megacenter concept is something that really attracted Home Depot,” said Gillespie. “You really increase logistical efficiencies.”

Ed Miller of Strategy Development Services, Avon, Conn., and former vice president of sales and marketing for Wiremold, West Hartford, Conn., was not surprised that Home Depot bought Hughes. “They always had ambitions to cater and expand more toward serving the pro,” he said. “But if they want to continue in this game, they need to be and act like a wholesaler.”

Home Depot first attempted to serve professional contractors through the electrical aisles of its retail stores. During his tenure at Wiremold, Miller believed this strategy wasn't really reaching the type of professional contractor that electrical manufacturers wanted most. “It was just the ‘truck slammer’ and the small single-person contractor,” he said. Miller said he had conversations with Home Depot at that time in which he explained the differences in doing business with electrical contractors and told them that if they wanted to operate in that business, the margin equation would have to be different, as would the method they used to serve and take jobs.

Miller believes integrating Hughes Supply into Home Depot will be a big challenge. “The markets that they serve really are different,” he said. “It's not as converging as communications and electrical have been over the last few years. With the consumer side, I don't see that as converging even though they have ambition to overlap into the small commercial area.”

Industry executives believe Home Depot will attempt to improve Hughes' profits by negotiating for better prices through enhanced volume purchasing agreements and by improving shipping, logistical and warehousing efficiencies. Miller is taking a “wait-and-see attitude” on exactly what Home Depot will do. While at Wiremold, he had a good experience working with Home Depot. “My relationship and Wiremold's relationship with Home Depot at the time was not adversarial at all,” said Miller. “It was very supportive. We did things together and worked on making it a win-win.”

Home Depot's Paula Smith said a cross-functional team from both companies is working together to integrate Home Depot Supply and Hughes Supply's operations and services. The team will consider issues such as whether it makes sense for Home Depot to have two different logistical networks for Hughes Supply and Home Depot or to combine them.

“At some point after closing, the combination of the two companies will deliver certain purchasing synergies; enhance overall operating effectiveness through scale, simplification and knowledge transfer; and accelerate growth by providing professional customers exceptional value, convenience and choice,” she said.

Hank Bergson, president, National Electrical Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y., believes the acquisition is a defining moment for the electrical industry. He believes the deal could have as much impact on the wholesale-distribution industry as Wal-Mart's move into the retail food market several years ago.

“It sent shock waves through the food distribution industry and it impacted a lot of people, both positively and negatively,” said Bergson. “In the food industry, it gave rise to national brokers that covered all 50 states and handled everything. It gave rise to some very strong regional brokers that handled regional preferences. It created some problems so the broker population was significantly reduced, as was the supermarket population.”

Home Depot's competitors in the retail world were probably happy to hear the company's recent announcement that it would scale back new-store openings over the next five years, as it hastens its push into home services and professional markets to drive sales and earnings. The company said it would open 400 to 500 stores through 2010, about half the number opened in the previous five years. Home Depot has more than 2,000 stores in the United States, Puerto Rico, Canada and Mexico.

Home Depot's Hughes Supply acquisition and its focus on serving professional contractors add a new competitive dynamic to the distribution world. But the success or failure of this deal and Home Depot's efforts to build up its Home Depot Supply division will depend on customers, and if they are willing to change their buying habits.

All in the Family

If the acquisition is approved, Hughes Supply will join a growing family of distributors that Home Depot Supply has acquired over the past few years:

Apex Supply. Provides plumbing, HVAC and industrial products to a variety of trade professionals across the Southeast United States.

Brafasco. Supplier of fasteners and industrial supplies to the Canadian market.

Contractors' Warehouse. A cash-and-carry supplier catering to the specialty heavy “handyman” and light remodeler, a key, fast-growing, professional customer segment.

Creative Touch Interiors (CTI). Design center partner to national, regional and local production home builders.

Georgia Lighting. Before the 1999 acquisition, the company was generally considered to be the largest independent distributor of residential lighting products in the United States.

Litemor Distributors. Canadian commercial lighting distributor.

MRO Distribution. Supplier of maintenance, repair and operations (MRO) products to owners and managers of multifamily, hospitality, educational and commercial properties; health-care providers; and municipal and government facilities.

National Waterworks. Distributor of critical products used to build, repair and maintain water and wastewater transmission systems in the United States.

White Cap Construction Supply Inc. Distributor of specialty hardware, tools and materials targeting large- and medium-sized construction contractors.

Williams Bros. Lumber Co. The country's 14th largest provider of building materials to the professional contractor.

Utility Supply Of America (USABlueBook). Distributor of maintenance, repair and operations (MRO) supplies to the water and wastewater treatment industry.

In addition to these distributors, over the past few years Home Depot has acquired the following installation businesses:

Chem-Dry. Franchisor for the world's largest carpet and upholstery cleaning and service provider network.

FloorWorks Inc., Arvada Hardwood Floor Co., and Floors Inc. Three different flooring installation companies primarily servicing production homebuilders.

RMA Home Services Inc. (RMA). Replacement windows and siding installation services.