Through The Fly's Eyes: Home Depot

from Theflyonthewall.com














Can A Private Equity Deal Get Financed?

Yesterday, CNBC reported private equity firms are supposedly running models to see if they can take Home Depot (HD) private. Home Depot's market cap is $77 billion and would be the largest private equity deal ever completed. Here is some back-of-the-envelope math:

* Home Depot's enterprise value is about $83 billion, the company only has about $ 6 billion in net debt
* 2006 EBITDA is estimated to be $10.8 billion, and is expected to grow to about $12 billion in 2007
* Enterprise value-to-EBITDA ratio is 7.7 x 2006 EBITDA and only 7.0 x 2007 EBITDA

These ratios can easily be financed. The wild card is how much real estate Home Depot owns versus leases. If Home Depot owns a lot of real estate, it could do a huge sale-leaseback similar to what Toys 'R' Us did in its private equity deal.

If private equity offered $90 billion, or about $42.80 per share and put down the usual 20% equity, the numbers would look like this: $18 billion in equity, $ 72 billion of new debt plus $ 6 billion of old debt.

If the cumulative $78 billion in debt was financed at 10%, that would come to $7.8 billion in annual interest expense versus 10.8 billion in 2006 EBITDA. That comes to a 1.4x coverage ratio. That is doable.

Nardelli has been complaining that the company should be run based on return on invested capital and not same-store sales growth. If he takes Home Depot private, the decision of how to run the company will be his to make.