Home Depot’s Buyout Of U.S. Home Systems On Track Despite Lawsuits

Home Depot‘s (NYSE:HD) efforts to buy out cabinetry refacing firm U.S. Home Systems, Inc. remain on track after solicitations of 70 other potential bidders by the latter did not turn up alternative offers. The acquisition plan was announced on August 7, 2012 when Home Depot said that it had entered into a definitive merger agreement with U.S. Home Systems. Under the terms of the merger agreement, the 1,000-employee strong U.S. Home Systems solicited acquisition proposals till September 5, 2012.

The completion of this period means that U.S. Home Systems can now be acquired by Home Depot’s THD At-Home Services, Inc. and Umpire Acquisition Corp., a  wholly-owned subsidiary of PHome Depot. The sale was sought to be blocked by four shareholder groups despite lack of bidders, on the grounds that the transaction was undervalued and U.S. Home Systems was not getting the best deal for its shareholders. ((U.S. Home Systems Home Depot Buyout On Track Despite Lawsuits, Closets Daily))

U.S. Home Systems manufactures or installs kitchen cabinet refacing products for kitchen remodeling, bathroom remodeling, and storage organization systems for closets and garages. It sells its services exclusively through Home Depot, the world’s largest home improvement chain.

Our complete analysis for Home Depot’s stock

Background

Home Depot had announced plans to acquire Dallas, Texas based manufacturer U.S. Home Systems Inc. for about $93.4 million, or $12.50 a share, to boost its home service business. The offer of $12.5 per share represented a 38% premium on U.S. Home Systems’ closing price on Nasdaq on August 6, 2012. U.S. Home Systems reported a revenue of $164.9 million for 2011. ((Home Depot Agrees To Acquire US Home Systems for $93 Million, WSJ))

Four law firms mounted a challenge to the deal pretty quickly. Each law firm questions whether the board fulfilled its obligation to get the best deal for shareholders. Law firms seeking to mount legal challenges to takeovers of publicly traded firms need a shareholder group with sufficient percentage ownership to mount a credible challenge, hence these firms have been trying to coax U.S. Home Systems shareholders into joining them. These firms are often compensated based on the success of their efforts. ((U.S. Home Systems Buyout by Home Depot Challenged, Woodworking Network))

The announcement came around the same time as Home Depot’s competitor Lowe’s Companies Inc.’s unsolicited offer for Rona Inc., Canada’s largest home improvement retailer. At $1.75 billion, it was obviously a much bigger deal but nevertheless, it has been spurned by Rona’s board, which has called it inadequate. The offer rejected by Rona reflected a 41% premium to its 20-day average closing price, but was less than 2% above the stock’s book value. The board as well as a number of analysts found it quite inadequate. ((Home Depot Beats Lowe’s to Merger Punch, 247 Wall Street))On the other hand, Home Depot’s deal seems to be happening relatively peacefully since The Board of Directors of U.S. Home Systems has unanimously approved the proposed merger. We think that legal challenges mounted by activist law firms won’t have much impact. In a worst-case scenario, Home Depot might have to shell out a bit more but the deal itself doesn’t look to be in jeopardy. Lowe’s, on the other hand, has a tricky political problem to handle.

How It Helps Home Depot

We believe that the acquisition should help reinforce Home Depot’s specialty home improvement product line, particularly due to the customization feature that U.S. Home Systems offers. ^[1] Home Depot has widened the gap between itself and Lowe’s in the last few years and would like to further consolidate its position. We believe that this acquisition is one in a series of many that we shall witness in future as the two competitors, Home Depot and Lowe’s, attempt to outmaneuver each other in every segment of the business.

We have a Trefis price estimate of $56 for Home Depot’s stock, which is in line with the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Mergers and Acquisitions Review: Home Depot BUYS U.S. Home Systems, KIT Digital Might SELL Itself, Wall St. Cheat Sheet [↩]