Shares of Home Depot (NYSE: HD) finished lower today as investors seemed to give a thumbs-down to its deal to buy SRS Distribution, a leading specialty-trade company that will help it expand its presence in the pro market.
The stock closed down 4.1%.
Image source: Home Depot.
Home Depot makes a big move
Home Depot will acquire SRS Distribution for $18.25 billion, including debt, and will pay for the deal with cash on hand in debt.
The move will expand Home Depot's addressable market by an estimated $50 billion, but the company said it would suspend share buybacks until it returns to its target-debt leverage of two times earnings before interest, taxes, depreciation, and amortization (EBITDA).
SRS will give Home Depot a stronger presence with its Pro customer, an area where it typically has an advantage over rival Lowe's. CEO Ted Decker said, "SRS is an industry leader with a proven track record of profitable growth across verticals."
SRS brings Home Depot assets including a 2,500-plus professional sales force, more than 760 branches across the country, and a truck fleet of more than 4,000 strong in addition to a healthy business serving the pro market.
Why investors don't seem to like it
Most Wall Street analysts who weighed on the deal had positive comments, but investors seem to dislike the pause on share buybacks and are skeptical of the deal at a time when Home Depot's valuation is high and the home improvement retail market still faces challenges due to a sluggish housing market.
The deal is certainly a risk for Home Depot and represents the company's first major move under CEO Ted Decker. However, if it can successfully integrate SRS, the deal should pay off over the long run.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.
