June 6, 2017 / 10:36 AM / 2 years ago

HD Supply to sell waterworks unit; shares slump on weak margins

(Reuters) - Shares of HD Supply Holdings (HDS.O) sank as much as 19 percent after the construction materials supplier reported another drop in margins at its biggest unit, while announcing the sale of its second-biggest unit, where margins have been relatively steady.

Adjusted EBITDA margin at the facilities management business, the company’s largest, fell 2.6 percentage points in the first quarter ended April 30 from a year earlier, marking its fourth straight decline.

The unit distributes everything from plumbing products to electrical parts used in facilities management.

In contrast, margins at the waterworks business, which includes water and sewer products, slipped about 0.2 percentage points.

The dip in margins at the facilities unit could suggest HD Supply is facing increasing competition from big-box retailers, analysts said.

“We have previously flagged the Waterworks transaction as a positive catalyst since it re-focused the portfolio on two end markets, is margin accretive, reduces leverage to sector norms and introduces a capital return deployment strategy,” Morgan Stanley analyst Nigel Coe said in a note.

“However, it is unfortunate that this announcement coincides with such a weak performance from the FM business.”

Shares of the Atlanta-based company slumped as much as 19 percent to $33.41 on Tuesday.

HD Supply, which was carved out of retailer Home Depot Inc (HD.N) in 2007, said it would sell the waterworks business to private equity firm Clayton, Dubilier & Rice to reduce debt and streamline its operations.

The company has long-term debt of $3.86 billion as of Jan 29.

HD Supply has been looking to position its construction and facilities maintenance businesses to benefit from U.S. President Donald Trump’s emphasis on infrastructure spending and tax reform.

The deal is expected to close in the third quarter.

Goldman Sachs was HD Supply’s financial adviser and King & Spalding its legal counsel on the transaction.

Reporting by Rachit Vats in Bengaluru; Editing by Maju Samuel and Shounak Dasgupta

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