Home Depot announced Tuesday that it has written down its investment in HD Supply -- a company it built, then sold for $8.5 billion -- all the way to zero.
HD Supply's sales fell about $5 billion in three years, according to a regulatory document. Home Depot reevaluated the value of its interest in Atlanta-based HD Supply, at one time worth $325 million. The conclusion? HD Supply's sales won't recover in the near-term, making the asset "impaired." Home Depot decided to value it at $0 on the balance sheet.
"Zero is a bad number," said HD Supply's CEO Joe DeAngelo, who was surprised by the move. He found out about it Tuesday morning when Home Depot issued a press release about earnings.
"I hated it," DeAngelo told The Atlanta Journal-Constitution Tuesday afternoon. "I looked at and said, ‘Come on guys.' To me, it's not remotely probable that it should be zero."
Carol Tome, Home Depot's chief financial officer, called it pure accounting. As background, under CEOs Arthur Blank and Robert Nardelli, Home Depot built HD Supply into a $12 billion division that sold materials and heavy duty supplies to home builders, large apartment complexes and government contractors.
Seeing the division as a distraction from the core business of running the big-box stores, current Home Depot CEO Frank Blake sold HD Supply division in 2007 for $8.5 billion to three private investment firms. At the time, Home Depot paid $325 million to keep a 12.5 percent interest in HD Supply.
Tome said accounting rules require her to ask whether the value would improve in six to nine months.
"Our view is no, it's not going to change because the economic recovery is not very robust. It's a judgment call we made," she said.
HD Supply's business has been ravaged by the housing downturn. But DeAngelo took issue with the "zero" valuation.
Perception of the company could be marred by the write down. And the timing couldn't be worse for HD Supply. On Monday, the company announced it is talking to banks about extending more than $3 billion in credit facilities that come due in 2012. One of the loans – for about a billion dollars – is secured by Home Depot.
DeAngelo said that HD Supply's other investors also have written down their investment -- but to about 20 to 40 cents on the dollar, not to zero.
"I'm the largest personal investor on the leadership team," DeAngelo said. "The company is worth less than when I invested it. I got that. But I'm certainly confident I'll get it back. It's my coin on the table."
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