The precision and data required to complete the refinance documents was significant, so you can imagine the effort required to develop and finalize them. Working closely with our board, our CEO, and the finance, strategic business development and corporate communications departments was also indispensable. Our refinancing transactions were all very successful and truly a team effort.
HD Supply was spun off from the Home Depot in 2007 to a team of private equity firms. What are the particular challenges to selling a company to a team of private equity firms rather than a single buyer?
I don't think having a team of private equity firms on the buying side instead of a single buyer necessarily complicates a deal. Spinning off a company, however, does lend itself to a very interesting dynamic. Essentially, the spun-off company is leaving one home for another, and that, in and of itself, can create challenges.
In our case, it was a very large deal, and by many accounts the last one to get completed before the credit markets froze up back in 2007. The potential for complications did exist, but our equity owners are highly experienced and deal savvy.
They also had experience working together on other transactions. As a result, it was as smooth as could be expected given the size and complexity of our deal and the difficult credit markets at the time. I think we benefited significantly from the experience and professionalism of the buying teams they assembled. I would add that working with private equity has been a terrific experience.
Every major deal tends to have one unexpected sticking point or glitch. Can you tell us what that was in the spinoff and how did you deal with it?
Our deal was very challenging, but also rewarding experience generally. Wall Street's finest law firms and banks were involved, and the buyers and sellers were very sophisticated. But you are correct, the deal had several interesting speed bumps, including the fact that the closing was called off three times and the credit markets were very volatile at the time.
The most unexpected sticking point was probably the post-close purchase price adjustment. Buyers and seller essentially disagreed with the value of delivered working capital, and this led to a very focused series of negotiations and even litigation. Purchase price adjustments are not uncommon, but this one got a bit more involved than most.
Having been a Home Depot attorney before I was an HD Supply attorney, I was in a somewhat awkward position. However, after some hard and collaborative work, we ultimately agreed to mutually agreeable terms out of court. It helped that experienced professionals were involved on both sides of the dispute.
After the spinoff, you set up your legal department. What were the most important aspects you needed and how did you get them?
HD Supply had been highly dependent on the Home Depot's legal team prior to the sale. Setting up a stand-alone operation, and doing it in less than 90 days, was a challenge. Aside from basic needs like office space and telephones, our highest priorities were to design the most effective and efficient legal construct and to recruit the best possible team talent to fill the positions.
Despite our size revenue-wise, we were a spinoff, and as a result there were inherent risks to joining this "new" organization. Still, we were able to assemble what we believe to be the finest legal department in the industry. A few years after the sale we commissioned a highly respected independent consultant to assess our legal department and among their conclusions was that we were operating at a cost of 30 percent below the top quartile of legal teams in comparable companies. Of course, I made sure our finance team received a copy of the report.
You also set up new systems and processes. Take us through the thought processes and how you satisfied your needs.