CD&R, Sterling combine $1bn in equity to create giant construction business

New York’s CD&R buys and combines HD Supply’s construction and industrial arm with Sterling’s CSG.

Clayton, Dubilier & Rice’s long-established history with HD Supply and Sterling Group positioned it to combine two construction distribution businesses in one of the largest industrial LBOs during the pandemic.

White Cap, the construction and industrial unit of HD Supply, will merge with Sterling-backed Construction Supply Group, a North American specialty concrete and masonry accessories distributor.

CD&R and Sterling’s combined equity value in the newly formed company equates to approximately $1 billion, with the latter rolling equity via its existing ownership in CSG, according to sources familiar with the deal.

The merged entity has a $4 billion enterprise value with $4 billion in combined revenue, representing one of the largest announced industrial LBOs post covid-19. HD Supply sold White Cap for a $2.9 billion price tag. The deal leaves CD&R and Sterling with 65 percent and 35 percent stakes, respectively.

HD Supply announced its original plans to split from the unit almost 10 months back. The company in September 2019 stated that its facilities maintenance and construction and industrial units did not share synergies and were better off running independently.

Management of the business arm previously intended to run White Cap as a publicly traded company but “CD&R’s offer to the board was compelling,” said a source close to the deal.

Deal discussions, which involved some pre-pandemic travel, benefited from the long-standing history between the New York-based PE firm and management. CD&R first bought HD Supply from Home Depot in 2007 and exited the business in 2014 after it went public.

Later, CD&R acquired Core & Main (formerly HD Supply Waterworks) from the parent company in 2017.

The buyout firm initiated discussions early this year, but the split-off, intended for completion in mid-2020, was deferred due to the pandemic. “There was no formal sale process; the sell side received inbound interest from CD&R,” said the source.

The deal for White Cap, expected to close in October 2020, is independent of the CSG acquisition.

CD&R also shares a relationship with Sterling Group dating to 2012, when it purchased Sterling’s Roofing Supply.

The White Cap transaction was all cash, whereas the combination with HDS included cash and debt. Debt financing was provided by Deutsche Bank, RBC Capital, Jefferies, BNP Paribas and Credit Suisse.

Pandemic impact

White Cap, which provides waterproofing, safety and other products for professional construction projects, saw its sales growth slip by 1.4 percent in May compared with the same period a year earlier.

“It is difficult to forecast whether new projects will replace delayed projects as we approach the latter half of 2020,” John Stegeman, White Cap’s current CEO said in its Q1 earnings call. “But our customers’ current backlog provides nice opportunity.”

Stegeman, along with Alan Sollenberger, White Cap’s current president, are expected to lead the combined business. Phil Knisely, CD&R’s operating partner and former senior executive at Danaher, will be chairman.

“Construction activity, remodeling and repair are more sensitive to the economic cycle,” a market source said, characterizing the industry as having “cyclical cash flow dynamics.”

That said, while the near-term outlook is closely tied to the economic cycle, the combined scale of White Cap and CSG make for a promising long-term outlook, the source added.

HD Supply in its Q1 results added that it won’t be providing a second-quarter 2020 or fiscal full year 2020 outlook given the outbreak.

Looking ahead, the concrete accessories and specialty construction mammoth is poised to expand its geographical footprint. White Cap is strong in the West, South and Northeast while CSG has traction in Canada and the Midwest, according to industry sources.

Action Item: Check out the press release for more detail.

Update: This report has been updated to clarify CD&R and Sterling’s combined equity in the deal as well as the cash and debt components of the multipart transaction.