Thursday, August 9, 2007

The Home Depot Buyback: My Question Answered.

Earlier this week I asked the question, "Is Home Depot's Buyback At Risk?". Well, Home Depot (HD) today said it is in talks with the three private equity firms that agreed to buy its supply unit and the subject will not please shareholders. The discussions will lead to a lower price than the previously announced $10.325 billion. The nation’s largest home-improvement retailer is talking to Bain Capital, the Carlyle Group and Clayton Dubilier and Rice about “material changes to the terms and financing of the transaction.”

In an anticipated (at least at Valueplays) kick in the chops for shareholders, citing the current market for financing, The Depot said that it would cut the price it will pay for its $250 million share tender offer to between $37 and $42 a share. When the buyback was first announced last month, they said they would pay between $39 and $44 a share. The offer was extended to Aug. 31 at 5 p.m. Why are they doing this? Easy, a lower price will lead to fewer shares being tendered. The fewer shares tendered, the lower total cost of the offer.

None of this should be a surprise, hopefully. The Depot has been misfiring for a while now and there is no reason this unprecedented buyback should be any different. If anything it should teach us a lesson about the ambiguous open ended share buyback announcements that do not commit management to anything but do make for a neat little headline. In short, they are meaningless.

Here is the worst part. This was to be the "cash" portion of the share buyback program. Home Depot has not even broached the "debt" part. Let's not forget, a large portion of this buyback was to be funded by debt and if they can't get the cash part due to current conditions, anyone want to bet the debt part will not happen anytime soon?

Like almost everything else they have done recently, the huge share repurchase announcement by Home Depot will end up making them look bad.

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