Meeting the challenges of spinning off, refinancing and building a legal team

Mary Welch, Special to the Daily Report

Daily Report

01-16-2013

Ricardo Nuñez is general counsel, senior vice president and corporate secretary for HD Supply, the Atlanta-based industrial distribution company that was spun off from Home Depot in 2007 and reported sales of more than $7.7 billion for the year ended January 2012. Nuñez focuses his expertise on compliance, complex commercial and supply chain transactions, international operations, and real estate and land use law.

Previously, Nuñez held leadership positions at General Electric Energy, which included lead legal counsel responsible for global manufacturing and sourcing, global compliances and sales of products and services. He also served as counsel at Esso Inter-America Inc, the Latin American affiliate of Exxon Corp., where he was responsible for downstream operations throughout Latin America and the Caribbean. He also spent four years at Steel, Hector & Davis, a Florida law firm, where he practiced real estate and land use law.

Nuñez received a bachelor's degree in economics from the Wharton School of Business in 1986 and his J.D. from Columbia Law School in 1989.

He serves on the board of the Georgia Hispanic Chamber of Commerce, where he is vice chairman of its Economic Development Committee, and of Nuevo Caminar Inc., a South Florida-based charity dedicated to the rehabilitation of people addicted to drugs. He also is on the board of directors of The Atlanta Speech School and Westminster Schools and has been active in various civic and charitable organizations, including Junior Achievement, Latin American Association, and National Society of Hispanic MBAs.

He lives with his wife, Carmen, three children—Ricky, 20, a student at the University of Georgia; Ale, 18, a student at Vanderbilt University; and Daniel, 9, a student at Westminster—and Charlie, a rescue dog, Madison Bubbles, a cat, and Fred, a hermit crab.

His hobbies are fishing (especially deep sea fishing), hiking and watching his children play sports, particularly wrestling, where his eldest son was a state finalist. On a recent fishing trip to Costa Rica his 52-foot Hatteras motor yacht caught fire and sank, requiring him, his son and three friends to jump into the Pacific Ocean and float until a boat came by and rescued them.

Tell us about your department and your role.

Our department has 11 attorneys, eight paralegals/contract specialists, and two executive assistants. On average each team member has approximately 20 years of legal experience. We've focused on hiring a team with diverse experience and skill sets, and our strategy has been to hire the absolute best—not only subject matter experts, but commercially savvy team players.

Within HD Supply we are not only viewed as lawyers, but as commercial partners. Also important is having team members that value giving back to society. Not only do our team members give back individually, but we do at least one community event annually as a team.

My role as general counsel is to help my team members achieve their personal and professional goals, while delivering the most effective, proactive and efficient legal advice possible. Oh, and if you don't have a sense of humor or like to have fun, our legal department is not the place for you.

Your company has done a lot of refinance activity. What is the most challenging legal aspect?

In the past two years (actually two years and eight months), we have successfully completed four major refinancing events. During 2012 alone, we refinanced approximately $5 billion over three transactions.

In each case, the refinancing was opportunistic, meaning that we did not have to refinance, but highly favorable market conditions made it an excellent opportunity to lower our overall debt cost and extend the maturity of our senior debt.

The most challenging aspect was preparing to launch at a moment's notice. Credit markets have been particularly volatile this year, and a market window can disappear as quickly as it appears. Over the course of each transaction, almost the entire legal team was engaged, some working around the clock, to help launch and close the transactions. Calls at midnight were relatively common and revising documents was constant. The deal documents were complex and included, among several others, a nearly 200-page offering memorandum.

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.

After fielding the right team, we then proceeded to build out and implement the legal processes and documents necessary to help HD Supply over-perform in the marketplace. Our team draws experience not only from private practice, but also from many other significant in-house legal teams. A goal of ours has always been to eliminate unnecessary bureaucracy, to redirect the time saved to focus on customer responsiveness, and to ensure delivery of the best legal product possible. Among other accomplishments, we have streamlined our contracts and enhanced our sales training.

We have also digitized our contracting processes. Virtually all of our transactional work is done in-house, with the exception of large M&A transactions. For our large M&A transactions, we complement our in-house team with outside counsel. Handling most of our work in-house allows us to provide not only timely and responsive legal support, but the insight that only a true insider can provide. Additionally, we have implemented a litigation management system that has been very helpful in streamlining and managing our litigation matters.

Do you use contract automation software?

Because we have seven lines of business and one Canadian operation across a variety of industries, our contracting scope and processes are varied. However, our lines of business and functions do use contract automation software. This software helps on a number of levels, including execution flow, contract maintenance and storage.

Additionally, the process of implementation has provided the added benefit of allowing us to re-evaluate our contracting processes to ensure that our overall contracting process is workable and efficient. Contract automation is an ongoing process that I anticipate will continue to evolve.

The construction industry has taken a hit the last few years. Has the legal department had to adjust?

The construction industry has indeed been challenged over the last four to five years. Fortunately, I work at a company where over-performing is what we do, so we've been fortunate to grow faster than our industry even during the downturn. An important component of over-performing is to spend and invest wisely. The legal department has always been careful not to grow faster than necessary, even during the upturns.

Equally as important, however, has been our ability to identify and support growth and savings opportunities. For instance, the legal department has been instrumental in renegotiating agreements with landlords and suppliers. These renegotiated agreements have helped us be more responsive to our customers, which ultimately benefits not only our customers but also HD Supply, our stakeholders and everyone else down our supply chain. The good news is we have found that almost every situation can result in a win-win; it just takes hard work and creativity to get there.

What are the biggest legal challenges a major corporation faces in dealing with Latin America?

Latin America provides excellent growth opportunities for our business. I've done business involving Latin America for almost two decades now and I've always considered it a highly professional environment. Having said that, like doing business anywhere, you need to make sure your compliance environment is not compromised in any way and that you enter the market in a way that allows you to maximize potential benefits.

At other points in my career, I have heard people speculate that it is acceptable to do business differently overseas, and perhaps run it in a way that might compromise compliance efforts. I vehemently disagree, and I think professionals overseas would disagree too. I've also been fortunate to work for companies and leadership that has always required absolute compliance.

My best advice is to tenaciously pursue business, but never compromise integrity, even in the rare circumstances where it might cost you a deal. Working hard, being in a position to offer the best products at competitive prices, and demonstrating a clear and unwavering commitment to integrity is not only your only option, but in the long run it will prove to be the winning strategy not only in Latin America but everywhere you do business.

What do you see as big legal challenges or future issues in complex commercial and supply chain transactions?

I believe future legal challenges and issues will not only be plentiful, but varied, which is perhaps good news for lawyers. Our growing regulatory environment, both at home and abroad, shows no sign of letting up, and this creates challenges not only in staying abreast of developments, but also operationalizing compliance.

As international markets emerge and businesses continue to expand into these areas, a host of legal and compliance issues will need to be addressed. Also, increasing competition in the future will bring not only the traditional competitive challenges and related legal issues, but also will drive technological development and the legal challenges that inevitably follow.

We have faced challenging markets the last several years, but that will eventually change. Something I learned years ago from one of my mentors was that challenging times were always fraught with legal risks, but good times and the complacency they can generate were far more dangerous from a compliance perspective. So when those good times come, be more alert than ever.