Home Depot: An Activist on the Board

An activist on the board.
An activist on the board.
Hi-ho, the dario,
an activist on the board.

After the close, Home Depot (NYSE: HD) announced an astonishing $22.5 billion increase to its share repurchase program. The Company will fund the $22.5 billion share repurchase with the net proceeds from the sale of HD Supply, existing cash on hand and the net proceeds from an anticipated $12 billion issuance of senior unsecured notes.

As you may recall, activist firm Relational Investors was awarded a board seat in February as part of a settlement on corporate governance matters. Relational was instrumental in getting former-CEO Bob Nardelli ousted and getting the company to look at a sale of the supply business, which was also announced yesterday. It can also be safely assumed that they had something to do with the buyback decision.

Here is my guess on how the board meeting went:

Frank (Blake, Chairman): But David (Batchelder from Relational), if we take on this much debt the credit agencies will cut our ratings.

David: F%@^ those pricks. Lever up that damn balance sheet.

Frank: But David, what about our customers? We can spend the money improving service.

David: F@^! the damn customers, shareholders are what matters. The customers can figure it out through trial and error or eventually they will run into what they are looking for walking around the stores.

Other Board Members: Proposal approved. What should we do next David?

Relational Investors' other holdings: ConAgra Foods (NYSE: CAG), Prudential Financial (NYSE: PRU), National Semiconductor (NYSE: NSM), Baxter International Inc. (NYSE: BAX), Sovereign Bancorp (NYSE: SOV), Unum Group (NYSE: UNM), Analog Devices Inc. (NYSE: ADI), and Sprint Nextel (NYSE: S).

Activist Investors Look Good In Recent Days

A handful of nice wins in recent days for activist investors:

Applebee's International, Inc. (Nasdaq: APPB) said its Board of Directors has formed a committee of independent directors to explore strategic alternatives for enhancing shareholder value, including a possible recapitalization or sale of the company. APPB is an activist target of Richard Breeden.

Ceridian Corporation (NYSE: CEN) announced that its Board of Directors has decided to explore a broad range of strategic alternatives to enhance shareholder value. The Board has retained Greenhill & Co., LLC as its financial advisor and Wachtell, Lipton, Rosen & Katz as legal advisor to assist in this effort. CEN is an activist target of Bill Ackman's Pershing Square Capital.

WCI Communities, Inc. (NYSE: WCI) retained Goldman Sachs & Co. to assist the Board and senior management in a thorough review of the Company's business plans, capital structure, and growth prospects, with the objective of enhancing the company's value for all of its shareholders. WCI is an activist target of Carl Icahn.

The Home Depot (NYSE: HD) announced that the Company and its board of directors have decided to evaluate strategic alternatives for its HD Supply business, including a possible sale, spin or initial public offering of the business. HD is an activist target of Relational Investors LLC.

Relational Investors' Batchelder Joins Home Depot's (HD) Board

Activist fund Relational Investors scores a board seat in its fight with Home Depot. Will it help the stock?

Late Monday, The Home Depot (NYSE: HD) and Relational Investors LLC announced they reached an agreement on corporate governance matters. As part of the agreement, David H. Batchelder, a principal of Relational, will join The Home Depot board of directors on February 22, 2007, and Relational has agreed to drop its proxy contest.

Batchelder also will be appointed to the Leadership Development and Compensation Committee and to the Audit Committee.

Link to past reports on Home Depot and Relational Investors

Activists Getting Respect and Results - NYT

The New York Times has a interesting article on how activist investors are getting respect and getting results. Link

The articles discusses this week's firing of Home Depot CEO Bob Nardelli, the fruits of Ralph Whitworth of Relational Investors who was ruffling feathers at the company. The article has interesting background on Whitworth, saying his fund, "oversees about $7 billion, all invested in only nine companies that are chosen with an eye toward activist intervention." The fund has averaged a return of 25% over the last nine year.

There is an interesting quote in the article from James V. Pickett, chairman of Wendy’s, which was itself the target of activism from Pershing Square Capital and Nelson Peltz back in 2005. He said, "Most of the issues the activists raised at Wendy’s were things we were already dealing with. They just increased the intensity. But when they own that much of the company, you have to listen to them even if you don’t want to.”

Recent Notes on Relational Investors

Relational Investors' Whitworth Comments on Home Depot's (HD) Nardelli News

Today's big news is the "resignation" of Bob Nardelli from Home Depot. Relational Investors, LLC Ralph Whitworth gave an interview on CNBC about its stance on the news. Relational recently sent a letter to Home Depot recently requesting changes, which the company disclosed in December. Link

On CNBC, commenting on today's news that Home Depot (NYSE: HD) CEO Bob Nardelli has left, Ralph Whitworth of Relational Investors, LLC, a firm that has been pushing for changes at the home improvement giant, said the news paves the way for strategic changes at the company. Whitworth said the stock is 50% undervalued and said his firm will continue their efforts.

Whitworth said the big questions is what Home Depot is going to do with their enormous cash flow. He said if the company continues on the same path they will continue to pressure the company. Whitworth wants the company to stop spending money on the supply business and instead use the money to buyback stock. He said the company is unlevered and can take on 20%-30% leverage, which they can also use for buybacks.

Whitworth said he was not completely surprised the company changed its support for Nardelli.

Whitworth said his firm has not yet met with the company, but plans to in next few weeks. He said the company needs fresh blood on the board, and said his firm intends to push to nominate their representatives.

NOTE: We will publish the link to the CNBC video when it is updated at CNBC.com

Relational Investors Submits Proposal for Changes at Home Depot (HD)

In a recent letter sent to Home Depot Inc. (NYSE: HD), disclosed by the company today, 0.64% holder Relational Investors LLC submitted a shareholder proposal to be considered at the company's 2007 Annual Meeting.

In the proposal, Relational Investors requested that the Board of Directors form a committee comprised exclusively of independent directors to evaluate the strategic direction of the Company and the performance of management, with duties to include studying strategic alternatives for the Company, including a major operational restructuring and/or recapitalization, a partial or complete sale or buyout of the Company, and/or a major recomposition of the executive team.

Relational Investors said it is submitting the Proposal because it believes there is opportunity for substantial appreciation in the value of the stock if the proposed changes are made.

In response to the proposal, Home Depot said it will oppose the formation of the committee but will accommodate a meeting with the firm to be arranged shortly after the first of the year.

Home Depot Proxy

Home Depot Press Release