Shares of HD Supply Holdings (NASDAQ:HDS) jumped 11% on Tuesday morning after the company said it has an agreement to sell its construction and industrial business to an affiliate of private equity firm Clayton, Dubilier & Rice (CD&R) in a deal valued at $2.9 billion.
HD Supply is a distributor of industrial and construction supplies. The company at one point was part of Home Depot, but was sold to a consortium of private equity firms including CD&R in 2007.
The PE firms returned HD Supply to the public markets in 2013 and sold off their shares, but CD&R apparently has kept in touch. In August 2017, the firm bought the waterworks division of HD Supply for $2.5 billion, changing its name to Core & Main. And on Tuesday, the firm returned again to buy another chunk of the business.
The assets to be sold are known as the White Cap business, a distributor of specialty concrete and construction products. CD&R is buying the business and combining it with rival Construction Supply Group, with CD&R holding 65% of the resulting entity and Sterling Group, owner of Construction Supply, holding the remaining 35%.
HD Supply said it expects net proceeds of $2.5 billion from the transaction, which will be used to return capital to shareholders, repay debt, and fund potential mergers and acquisitions.
The deal marks a change in strategy for HD Supply, which last September announced plans to split the White Cap business off as a stand-alone public company. A lot has changed since then, and management seemingly decided the price CD&R was willing to pay justified the tax hit from selling the assets and forgoing a spin-out.
Post-deal, HD Supply will be a more specialized company focused on facilities maintenance supplies. The resulting company should be able to reliably generate cash to be put to work either consolidating its market or through returns to shareholders, which was reason enough for investors to rally into the shares on Tuesday morning.