By Craig Webb
Calling it "one of the absolute finest assets that we've seen" in decades, The Home Depot (THD) announced March 28 it will acquire SRS Distribution, one of America's biggest specialty dealers, for $18.25 billion--roughly 16 times last year's EBITDA.
The purchase brings The Home Depot a $9.8 billion company that gets roughly two-thirds of its revenue from roofing, siding and other exterior products, about one-sixth from its landscape division and one-sixth from its pool supply unit. SRS has roughly 760 branches in 47 states. For 2023, it posted $1.1 billion in EBITDA (earnings before interest, taxes, depreciation, and amortization) but only $75 million in net earnings. TD Cowen Equity Research estimates SRS' EBIT (earnings before interest and taxes) margin at 5.3% in 2023. THD's is 14.2%.
Given that it will take many months to finalize the deal, and given SRS' growth expectations for this year, analysts expect the deal will be worth at closing a multiple of 13 to 15 times EBITDA.
SRS will remain a separate operation and its 10,800 employees will continue to be led by Dan Tinker, one of the company's founders.
Why do this deal? Home Depot officials cited these reasons:
It expands THD's total addressable market by $50 billion and automatically earns THD a big share of those dollars.
It brings to THD a company skilled in trade credit, a subject that THD is only experimenting with now. Company executives told analysts they were even willing to consider letting SRS manage THD's entire trade credit and collection program.
It broadens and deepens THD's product mix, and adds 4,000 flatbed, box, and boom trucks to the delivery fleet.
SRS has a history of rapidly absorbing acquisitions. It prides itself on being able to convert the acquired company's ERP system to SRS' version on Day 1 of the takeover.
"An asset of this quality is truly too good to pass up," CEO Ted Decker said. "I've been here 24 years, and in my 24 years looking at assets in our space, this is one of the absolute finest assets that we have seen."
THD officials said this acquisition was less a matter of adding synergy and more a case of growing THD's overall business. Getting even more business from pros--who already account for 50% of THD's revenues--is one of the company's major initiatives.
In a sense, SRS was born to be sold. Its founders had worked in previous companies that rolled up businesses nationwide and then sold them to private investors. SRS has remained private throughout its 16-year history. Berkshire Partners has had a major stake in the company since 2013, and Leonard Green & Partners bought in in 2018.
"The proposed acquisition will clear a pathway for accelerated growth with the residential and commercial professional customer by expanding The Home Depot’s Pro capabilities, combining online, retail, and wholesale," SRS said in a news release."The combined platform will open new opportunities for existing suppliers and partners by providing access to SRS’ expert workforce focused on specialty verticals, as well as The Home Depot’s cross-project expertise, product mix, network, and digital assets."
The deal is expected to close by the end of THD's fiscal year, in January 2025.
Stifel Financial Corp. regarded this news as a plus for Beacon Building Products: "First, the implied transaction multiple on the roofing business points to upside for BECN," the financial analyst said. "Second, we believe the announcement highlights the defensibility of BECN’s model as HD would rather buy than build out its last mile delivery network. Lastly, ~45% of the market remains beyond the control of the three largest players suggesting investors should expect no change to [Beacon's] strategy to drive above-market growth through organic/greenfield openings and strategic M&A."
Stifel also surveyed more than 90 roofing contractors about the news. It learned 90% of the respondents didn't expect the news would alter where they bought their shingles.
"We believe the SRS acquisition helps HD meaningfully accelerate its complex Pro journey which will be a key future driver of the company's growth," TD Cowen said in its analysis. But it added later: "[W]e acknowledge THD is paying a premium multiple for the business (16.1x 2023 EBITDA and we est 13.7x FY25 EBITDA), and will need to execute well. Checks on the SRS management team have come back strong, and we think HD will do a good job of integrating it, but it is admittedly a very different type of business and HD will simultaneously need to maintain momentum at HD Supply, Construction Resources, build its own complex Pro business, and core cash & carry Pro business."
Frank Dix, VP of Sales at Zonda, said the acquisition "underscores the big box stores' efforts to enhance their offerings for the 'Complex Pro' segment, recognizing the complexities of catering to large contractors within traditional retail settings. With SRS maintaining its independence under THD's umbrella, I'm excited to see the synergies that may arise from leveraging online, retail, and wholesale platforms."